Jonathan H. Choi, The Substantive Canons of Tax Law
, 72 Stan. L. Rev.
___ (forthcoming 2020), available at SSRN
Jurists and legal scholars who think about methods and approaches for resolving questions of statutory meaning like to talk about traditional tools of statutory interpretation and the metaphorical toolbox in which those tools are kept. Textualism versus purposivism; the relative merits of text, history, and purpose; and the meaning and utility of both semantic and substantive canons are all common fodder for discussion and debate. Adding to the literature at the intersection of statutory interpretation and tax, Jonathan Choi offers an interesting and thorough treatment of why we ought to think of tax anti-abuse doctrines like the economic substance doctrine, the step transaction doctrine, and the assignment-of-income doctrine as substantive canons of statutory interpretation. (Helpfully, Choi provides a nice appendix, including footnotes, in which he catalogues substantive tax canons, including a couple of “not a canon” entries.)
Choi begins his article by surveying all of the reasons we ought to be dissatisfied with the status quo of tax anti-abuse doctrines. Courts and the IRS do not apply tax anti-abuse doctrines consistently. The Internal Revenue Code’s own terms sometimes contradict a particular tax anti-abuse doctrine, for example by requiring form to trump substance notwithstanding the doctrine preferencing substance over form, exacerbating the difficulty. Also, because tax anti-abuse doctrines are purposivist by nature and origin, they do not mix very well with the more textualist approach to statutory interpretation adopted by contemporary courts. Overall, the picture that Choi paints of tax anti-abuse doctrines is one of confusion and inconsistency.
Having identified the problem, Choi turns to his proposed solution, “the substantive canon framework.” Drawing from the literature and jurisprudence on statutory interpretation, Choi describes substantive canons as “inform[ing] the substantive meanings of statutes based on normative concerns.” A nontax example of a substantive canon is the rule of lenity, which calls upon reviewing courts to construe ambiguous criminal statutes to favor defendants, for reasons rooted in notions of democratic legitimacy and fair notice. Yet substantive canons are not necessarily purposivist in nature. Critically, given Choi’s account of the problems facing tax anti-abuse doctrines, textualists often rely on substantive canons to help resolve statutory meaning. Hence, Choi contends that courts should think of tax anti-abuse doctrines as substantive canons, and should employ them as such by asking two questions: first, whether the facts and circumstances of a taxpayer’s case suggest that a tax anti-abuse doctrine is relevant; and if so, then second, “whether statutory text or purpose rebuts this presumption.”
Central to Choi’s two-step framework is his characterization of substantive canons. As Choi acknowledges, some scholars and judges think of substantive canons as mere “ambiguity tie-breakers” that apply only “‘at the end of the interpretive analysis,’ after statutory text, legislative history, or whatever other tools the court prefers have still left the court ‘in great doubt’ about the statute’s meaning.” Choi disagrees and classifies substantive canons instead as rebuttable presumptions that apply “at the beginning of the interpretive analysis,” on the ground that “this is closer to how they are currently treated.” In particular, he maintains that textualists actually are “more likely to use canons…as ‘safety valves’ that prevent formalist textualism from producing absurd results.” Well, perhaps. Regardless, Choi’s two steps clearly place the tax anti-avoidance canons at the beginning rather than at the end of the analysis.
Choi goes on to apply his two-step substantive canon framework to a handful of cases. And he then suggests that, even if judges do not want to adopt his approach, Congress can mandate it by codifying the tax anti-avoidance doctrines, much as it did in 2010 with Internal Revenue Code § 7701(o) and the economic substance doctrine (though, as discussed below, §7701(o) arguably leaves open a pretty critical question regarding the timing of the doctrine’s consideration). Finally, Choi addresses potential criticisms. He defends tax anti-avoidance doctrines as providing the sorts of background norms on which substantive canons typically are based.The tax anti-avoidance doctrines, he maintains, reflect longstanding and universally-accepted concepts that are familiar throughout the community of tax experts and lawyers more generally—so much so that drafters of tax legislation undoubtedly take them into account. Choi also contends that his substantive canon framework fits well with the nature of tax anti-avoidance doctrines, allowing courts to employ them in a more intuitive (and thus more consistent) manner.
Choi’s article contributes to the academic literature simply by engaging seriously and deeply in the tax context with the more general scholarship and jurisprudence regard substantive canons, though he is by no means the first scholar to do so. His treatment of tax anti-avoidance doctrines as substantive canons is not, however, purely theoretical. This fall, the Supreme Court will decide whether to grant a petition for certiorari filed in Tucker v. Comm’r, with former Solicitor General Gregory Garre as lead counsel, asking the Court to decide whether the economic substance doctrine is “properly invoked only as a tool for interpreting the meaning of tax laws,” or whether it may “be invoked to supplant any tax results that…stem from the application of clear, unambiguous, and mechanical provisions of tax law.” According to the Tucker cert petition, irrespective of Internal Revenue Code § 7701(o), the circuits are divided over exactly when to apply the economic substance doctrine, with some circuits relying on the doctrine more like an ambiguity tie-breaker, and others invoking the doctrine even where the Code’s text is unambiguous.
Neither the cert petition in Tucker nor the circuit court opinions it cites rely upon or address Choi’s substantive canon framework. For that matter, the taxpayer’s position in Tucker clearly would relegate the economic substance doctrine to the role of ambiguity tie-breaker, rather than the rebuttable presumption that Choi prefers. Nevertheless, the Tucker cert petition’s framing of the economic substance doctrine in traditional statutory interpretation terms is consistent with Choi’s suggestion that we think of tax anti-avoidance doctrines in such a way. And, whether or not the courts adopt Choi’s substantive canon framework, perhaps recharacterizing tax anti-avoidance doctrines as tools of statutory interpretation will, in one way or another, help resolve the confusion and inconsistency that Choi identifies.
In Tax Equivalences and Their Implications, Alan Auerbach reviews some of the commonly invoked equivalences that have been incorporated into the vocabulary of tax policy discussions during the last half-century. He offers a quick (and refreshingly accessible) summary of the analysis economists have used to break down the study of tax instruments so that their predicted impacts can be compared in terms of their overall effect on the economy. More important, he points out the situations in which these generally useful assumptions about equivalence across tax instruments will not hold, and, in doing so, hints that arguments from equivalence may have sometimes played a perhaps oversized role in tax policy discussions.
Equivalence for Auerbach’s purposes generally refers to the idea that identified tax policies have, in his words, “the same impact on fundamental economic outcomes.” One key economic outcome is the extent of the misallocation of resources resulting from the dead-weight losses taxes always entail. Under an economist’s view, for instance, a labor income tax can be seen as equivalent to a consumption tax as long as there is no initial wealth (and therefore earnings are only derived from labor) and all earnings are consumed.
Not so very long ago, governments seeking revenue had to grab it wherever they could. The possibility of adequate revenue collection, given the physical and political constraints faced by a government, was pretty much the only relevant criterion in tax base design. Consideration of the impact of any particular levy in the overall economy was an indulgence few governments could have undertaken, even if they had had the analytical tools to do so. Gaining popular acceptance of a tax, based on such theoretical analysis, was rarely imagined.
This situation has been reversed over the last century or so. Choices among tax policies now take into account more than just the relative likelihood of collections adequate to meet the demands of the government’s creditors. Proposed revenue measures are regularly subject to economic analysis to predict their impact on the economy, and implemented revenue measures are subject to scrutiny (albeit less often) about whether these predictions have been fulfilled. Indeed, the theoretical endorsement of economists has become a primary motivator of innovations in tax base design.
Prominent in the arguments used in these endorsements has been the possibility of equivalences among various stylized tax bases. These potential equivalences have been the drivers behind many tax policy proposals—both for entirely new tax structures and for tweaks in old ones. The potential equivalence between a value added tax and a wage tax combined with a cash flow business tax (an equivalence that relies on normal returns to all factors) was the driving insight behind the “flat tax” proposals of the 1980s. (P. 86.) The potential equivalence between a destination-based cash flow tax and a value added tax with a deduction for wages was both the analysis behind, and the downfall of, the tax urged as part of the 2016 Republican platform. (P. 103.)
Some of the equivalences Auerbach explores may only be of academic interest, and then only to those legal academics least concerned with on-the-ground implementation. The conditions under which changes in investment portfolios can render a tax on risk-free returns equivalent to a tax on wealth (P. 89) may be one such discussion. So might the presentation of a retrospective capital gains tax as equivalent to a realization-based capital gains tax. (Pp. 100-01.)
But there is much here that would help a legally-trained student of tax policy who is making an initial attempt to engage with the economists’ contributions to tax policy debates. One such benefit is a warning about the possibility that the economist is stating her conclusions about rates as they would apply to a tax-inclusive base rather than a tax-exclusive base. (A 20% sales tax, as normally stated in tax statutes, imposed on a tax-exclusive sales price base could be sold as a 17% tax, if the proponent is referring to a rate stated on a tax-inclusive base; 20 is 20% of 100, but less than 17% of 120. (P. 85.))
Another payoff is in Auerbach’s acknowledgment that the equivalence assumed in economic analysis will often not be honored under traditional ways used by lawyers and other non-economists to classify taxes. He further observes that classifications, because they are often codified in constitutions and other grants of revenue-raising power, can operate as serious real-world constraints on tax policy.
Auerbach’s observation here is both more timely and more timeless than he may realize. Unmentioned is the additional complicating fact that each different classifier may approach the classification differently, even when the same label is applied—the “direct tax” constraint that the U.S. Congress faces probably does not apply to the same group of tax instruments that are covered by treaties addressing “direct taxes.” It is somewhat ironic that imagining equivalence among taxes was the essence of the 1796 Supreme Court’s early approval of the federal carriage tax as not a direct tax. Congress could, everyone conceded, have imposed an excise tax on the purchase of a carriage. Given that this result was permissible without apportionment and therefore regardless of the geographical aspects of the economic impact of the tax, why couldn’t Congress, in effect, require that tax to be paid in installments over the life of the carriage instead of on its purchase? If one assumes all carriages have a similar life (and ignores any problems that might be associated in transition with the imposition of a retroactive excise tax), the equivalence holds, as the opinion of Justice Paterson effectively argues in Hylton v. United States.
The biggest reward to the reader is in the discussion of the circumstances in which the equivalences that can be so useful as assumptions in theoretical analyses can break down in the real world. Market imperfections can be one source of breakdown. Labor taxes will be harsher than consumption taxes with the same present value if the earner cannot borrow against future earnings. (P. 92.) Immediate expensing can be better than deductions with the same present value for similarly liquidity-constrained firms. (Pp. 92-93.) Expensing will not be equivalent to exemption in the face of above-market returns. (P. 93.) In other circumstances, the full implications of equivalences can be obscured because of inadequacies in information and its reporting. Auerbach calls out government accounting rules, that use truncated timing windows (P. 95) and financial accounting rules that use nominal rather than discounted values (P. 96), as culprits here.
In his conclusions, Auerbach stresses the importance of considering the ways in which equivalences may fail. He further notes that this consideration is useful in understanding the political reasons for choosing one approach over another. Here, he seems to be implicitly conceding that the rhetoric based on theoretical equivalence may sometimes receive oversized importance.
Miranda Perry Fleischer & Daniel Jacob Hernel, The Architecture of a Basic Income
, __ U. Chi. L. Rev.
__ (forthcoming), available at SSRN
(Mar. 27, 2019 draft).
Miranda Fleischer and Daniel Hemel have written a terrific article, The Architecture of a Basic Income, about a universal basic income, or UBI. They offer concrete policy advice grounded in philosophical priors. They successfully separate questions about fundamental policy design from questions about political packaging. Their paper should become a go-to resource for the increasing swell of interest in UBI policy.
Fleischer and Hemel give the following definition of UBI: “[A] program that ensures that all members of a polity have access to at least a minimum sum of money.” (P. 6.) They provide three philosophical perspectives that support a UBI: welfarism, founded on the premise of declining marginal utility of income; resource egalitarianism, or the idea that ex ante redistribution should support each individual’s ability to develop; and libertarianism, based on the Lockean proviso that individuals’ acquisition of property rights should leave “enough, and as good,” for others.
The choices that Fleischer and Hemel recommend for UBI design seek a philosophical consensus where possible. But despite their fidelity to philosophical foundations, their recommendations manage to stay grounded and pragmatic. Fleischer and Hemel acknowledge the arbitrary nature of some line-drawing exercises and explain available benchmarks. At key junctions when differing philosophies support inconsistent answers, they turn to simplicity of administration as a tiebreaker. And they are honest about how expensive a UBI would be, while correctly explaining that the funding mechanism can leverage the redistributive potential of the entire federal income tax system, rather than relying on poorly designed phaseouts.
The authors highlight six design issues raised by a UBI and make recommendations in each category, as indicated below:
- Size: $500 per month.
- Eligibility: All citizens and lawful permanent residents regardless of age.
- Uniformity: Yes. For instance, no explicit income or asset phaseout (but see Funding Mechanisms, below) and no geographic cost of living adjustment.
- Assignability: Limited. For instance, allow use of one year’s worth of future payments as collateral for loan.
- Payment Mechanism: Biweekly, via Social Security Administration.
- Funding Mechanisms to cover nearly $1.9 trillion cost: (1) elimination or reduction of some cash and cash substitute transfer programs, plus (2) an income tax surtax administered by the Internal Revenue Service.
(Pp. 4-5.) When Fleischer and Hemel discuss the Size and Assignability features, they acknowledge that each presents a line-drawing exercise that invites a somewhat arbitrary answer. Yet the authors also provide useful benchmarks. $500 per month amounts to about half poverty level income, or the “deep poverty” threshold. It also translates to a cost of about 10% of GDP, which is approximately the gap between government spending in the U.S. and government spending in some other OECD countries that have more robust public safety nets. (P. 30.) The recommendation for limited assignability is likewise a “tentative” suggestion about line-drawing in the face of opposing considerations of welfarism (which might resist assignability) and libertarianism (which might support it).
The authors’ conclusions about Eligibility and Uniformity also illustrate their efforts to reconcile philosophical tensions. Providing a uniform amount to every individual amounts to an unconditional UBI, one that is not limited, for instance, by cost of living based on location, age, disability, willingness to work, school attendance, nutrition or health care requirements and so forth. Libertarians, the authors say, as they have in prior work, will prefer that “if transfers are to occur at all, they should be unconditional and unrestricted.” But Fleischer and Hemel admit that the welfarist and resource egalitarian cases for an unconditional UBI are weaker. Restricted transfers (for instance, in-kind transfers of housing or health care) might increase welfare more than cash. Conditional transfers (for instance, contingent on disability) might better equalize ex ante of opportunity. But they treat the question as empirical, and say that the evidence does not suggest that restricted or conditional transfers increase welfare more, or even the playing field more effectively. They also express doubt about the law’s capacity to accurately identify welfare-increasing or opportunity-leveling conditions. Ultimately, Fleischer and Hemel give the tie to simplicity of administration and favor an unconditional UBI in the face of uncertainty about welfarist and resource egalitarian outcomes.
UBI proposals, as Fleischer and Hemel explain, frequently get stuck on a phase-out question. The logic of the phase-out question is as follows. If the purpose of a UBI is to ensure that everyone has access to “at least a minimum sum of money,” then individuals who already have enough should not get a UBI. If individuals who already have enough should not get a UBI, then a UBI should be phased out, for instance based on income. This is the way that existing transfer programs work. The problem is that such phaseouts can result in extremely high marginal rates of tax on extra dollars of income or wealth, sometime exceeding 100%. (P. 56.)
But as Fleischer and Hemel point out, program-specific phaseouts are unnecessary. Instead, the desired result of gradually removing the benefit of a UBI as an individual’s income increases can be neatly and completely accomplished through the federal income tax rate schedule. This is what Fleischer and Hemel propose. They explain that the broader income tax system can accomplish less distortionary phaseouts when each individual receives a UBI. (P. 9.) They also specifically recommend an income tax surtax of about 7%. This would raise the $1.2 trillion needed to fund a UBI assuming the repeal or modification of several other transfer programs. This surtax, they calculate, would mean that a single individual’s UBI would not be fully offset by additional income tax until an income level of $60,000. (P. 57.)
Fleischer and Hemel show that a universal UBI paid for through the income tax system could be politically framed as a poverty relief policy. Underneath the hood, the UBI and the income tax system would join together to pursue the goals of the policy without extreme phase-out distortions. At the same time, the program could be honestly presented and justified as a redistributive project that squares with a range of philosophical viewpoints.
John Snape and Dominic de Cogan, two legal scholars from universities in England, have provided a significant contribution to the emerging scholarly discussion in many different countries about the nature and limits of the law—not just tax law, which is their nominal domain in this chapter and book, but of all law. Without being at all polemical, and although they give a fair hearing to those with whom they disagree, they make an undeniable case for the claim that the study of tax law is ultimately the study of, to be honest, everything.
Their argument is subtle and nuanced in a number of important ways, but in the end they could not be more clear. Tax laws are, in the point of view to which they adhere, “not exclusively legal and not even exclusively about tax.” (P. 25.) Even detailed tax statutes have “no coherence or morality outside [of a] political and public law context.” (P. 25.)
Here, I explore a few of the subtleties of their argument and, much more importantly, the ultimately revolutionary impact that this chapter could and should have on our understanding of the study of tax law.
Snape and de Cogan’s edited volume is part of the Landmark Cases series, an analogue (which the editors readily acknowledge) to the Stories series in the United States that began with Tax Stories. Like its American counterpart, a Landmark Cases volume can serve as an avenue for understanding an area of the law through the study of a small canon of foundational legal decisions that continue to shape our understanding of that particular area of the law.
Especially for those who are interested in comparative perspectives in taxation, then, this volume is essential. In particular, it provides insights about tax avoidance and the nature of compulsion in tax law, in the British context. But the reason that I am reviewing here only Snape and de Cogan’s introductory chapter, rather than the (extremely valuable) book within which it resides, is that they make an argument in twenty-six elegant pages that, as I suggested above, should be understood as the planting of a flag in an ongoing debate over the nature of law and its interpretation.
This is not to say that the authors would ever be so immodest as to make a claim to universality. They are careful and measured in their words, and they allow the argument to become evident to the reader through its own power. That modesty, however, should not obscure what is truly at stake.
Within the first few paragraphs of their essay, Snape and de Cogan make two essential choices that frame the way we will think about this topic going forward. First, they acknowledge without fanfare that there is an ideological split that drives much of tax analysis. They do not waste our time with claims that the complicated nature of law cannot be reduced to two schools of thought, because it can. They do not use the words “right” and “left” as shorthand descriptors, but that is what this is all about. The classical economic liberals and self-styled libertarians who “emphasize property rights, balanced budgets and small government” (P. 1) disagree with “those who emphasize solidarity, individual duties as opposed to rights, fiscal stimuli and a large state.” (P. 2.) The authors acknowledge the necessarily broad terms of these descriptions, but there is no pretense that they have found a “third way” or some unifying factor that others have missed.
Having made the refreshing choice, without being argumentative, simply to acknowledge that the analysis is correctly understood as the familiar right/left split, Snape and de Cogan then make a second distinction that is even more important—and that ultimately, though not obviously in an ex ante fashion, explains why the left side of that split has the better of the debate. They explain that the proper topic of discussion is “revenue law,” not merely “tax law,” which includes “both its ‘raising’ and ‘expending’ sides” (P. 2), or in American English, the entirety of both the taxing and spending sides of the fiscal state. This goes beyond even the concept of tax expenditures, encompassing direct expenditures and indeed all activities of (all levels of) government.
Why is this important? Although Oliver Wendell Holmes’s famous observation that we “get civilized society” in exchange for paying taxes (to which the title of this Jot pays homage) might not be as well known in the UK as it is here, Snape and de Cogan are very much on the same page as the great jurist. They state plainly that, “without revenue law, there would be no United Kingdom of Great Britain and Northern Ireland.” (Pp. 24-25.)
Why does that truism matter? Using a broad meaning of “welfare,” they point out that “[t]he strict division that can be made between tax and welfare law on a certain understanding of property rights dissipates if entitlements to benefits and liabilities to taxes are reconceived as equally dependent on law, rather than being referable to some pre-legal property entitlement.” (P. 3.)
Readers who are familiar with The Myth of Ownership, Liam Murphy and Thomas Nagel’s now-classic 2002 book, will readily see that the Snape/de Cogan analysis provides the broader framework within which Murphy and Nagel’s argument fits. It is not only (as Murphy and Nagel correctly explain) that pre-tax income is an incoherent concept because any choice of a tax system— even to fund an absolutely minimal state— necessarily changes the amounts that people would think of as “their” income from which the state extracts a share. It is much larger than that.
Snape and de Cogan make clear— and I am not saying that they “argue” this point, because they are simply making an observation that is logically unavoidable and is not a matter of debate— that the “property entitlements” that determine economic and social outcomes are not “natural” or preordained. Different politically determined choices about such entitlements necessarily change our incomes, our relationships to the state, and our dealings with one another.
Revenue law can “pinpoint the nexus between personal freedom and collective wellbeing” (P. 16) because, for example, anti-poverty law “benefits poorer people [but] also enmeshes them.” (P. 25.) Most fundamentally, “revenue law moulds how goods in society are distributed in the furtherance of political decisions.” (P. 25.) Even looking only at what might seem to be narrow rulings in tax cases, “the legal questions in each case are a function of earlier political judgements, or to be more precise the expression of the judgements in revenue statutes.” (P. 9.)
In short, Snape and de Cogan frame a book containing classic cases in tax law as a means of understanding the deeply social and political nature of tax law, revenue law, the government, and the people’s interactions in what they hope will be a civilized society. Seeing issues from this more inclusive framing will allow legal scholars to contribute to that desired outcome without unnecessarily narrowing (and thus inevitably distorting) their focus.
Thomas Piketty’s work brought the reality of unequal distributions of wealth into mainstream media and popular discourse. In the tax world, the conversation now regularly turns to a consideration of whether and how the international tax regime contributes to existing patterns of wealth and income distribution across nations. Certainly, the tax norms and rules that shape the basic roadmap of international tax (including source, residence and permanent establishment provisions) contribute to existing distributions of wealth—and relatedly taxable income—across jurisdictions. Why do these patterns persist? And perhaps more importantly, what would it take for change?
A recent article by Tarcísio Diniz Magalhães aims to develop answers to both questions. That article builds on an active conversation in international tax. In responding to the question, Magalhães argues that the international tax world we see today is the product of a 100 years of tax policy advocacy and design by a subset of nations and actors—and that this subset has maintained a hold on international tax policy norms through a combination of power and expertise. Although the story of developed economies dominating the origins of international tax is not new, Magalhães offers a nuanced argument regarding how these countries have maintained their level of influence in policy design. His weaving of technical tax expertise into a narrative that has typically been cast as a raw power play provides a closer look at the mechanisms by which privileged positions can be maintained. This process of tax law design is, in his view, more important than the substantive outcomes—although the substantive outcomes have been less than ideal from the perspective of many developing countries.
Magalhães builds on a claim from international relations theory that when issues and debates are framed as technical ones demanding expertise, that characterization allows their resolution to be placed in the hands of a small group of experts. To the extent parties are deemed to lack expertise, they are excluded from decision-making. The expertise approach allows important policy choices to be removed from the sphere of political debate and beyond the reach of most participants. As Magalhães describes the process, “technical discourses in general have the propensity to hide, behind a veil of neutrality and scientificity, normative assumptions about what is right and wrong, what is fair and unfair, while denying the presence of ideologies and entrenched power relations.” The claim does not require that experts affirmatively engage in a subversion of political dialogue—it is simply the outcome of a process that predictably and historically has excluded a range of players from direct participation. Magalhães notes that the “inherently political” nature of tax law, though known to tax scholars, has nonetheless received inadequate attention in the formulation and analysis of tax policy. Ultimately, expert driven conversations can “delegitimize moral disagreements” over rules, practices and norms.
Turning to tax, Magalhães challenges a characterization of the current international tax regime as a system of neutral principles so widely accepted that they should be considered part of customary international law. Moreover, even if these principles have been widely adopted, he contends that fact does not justify a process that generates significant distributional effects, is not universally accepted, and was not the product of broad-based participation among nations. Magalhães details the role of the OECD in serving as the locus of international tax expertise and dialogue over many decades in what he describes as a “club model” of global tax governance.
Following this line of argument brings us to the question of how this process of international tax law design might change. Although the dissection of the international tax regime provides ideas regarding what kinds of changes to global governance would be needed to unseat both current actors and current processes, it turns out that promising alternatives are difficult to identify. Magalhães reviews a number of different recommendations offered by others seeking to broaden participation in international tax policy creation. Among the most prominent is creation of an international tax organization (ITO), which could provide technical analysis and support and serve as a truly global forum in which countries could coordinate or harmonize their taxes. Over the years, this option has been advocated by a variety of scholars, tax specialists and others including Vito Tanzi, Fran Horner, Michael McIntyre, and Kofi Annan. More recently, the prospects for an ITO have been revitalized by the work of three political theorists (Thomas Rixen, Peter Dietsch, and Douglas Bamford).
Magalhães details the OECD resistance to an ITO (an idea that in fact never secured a sufficient footing in tax policy circles to be pursued). But he does not stand behind the new calls for an ITO which are grounded in a goal of curbing tax competition and which envision a new body “entrusted with lawmaking and enforcement power [and] sanctioning governments that engage in tax competition.” Although acknowledging potentially serious concerns with tax competition, Magalhães resists the claim that there is a universally agreed anti-tax competition norm which can serve as a fundamental and binding norm of the newly re-proposed ITO. Because no such universal norm exists, an ITO regime would mean that developing countries (and here others) would find themselves under a body whose principles were both fixed and pre-established by nonmembers. Nonmajoritarian rule would be replicated once again in international tax.
Moving away from ITOs, three tax analysts (H. David Rosenbloom, Noam Noked, and Mohamed S. Helal) have come together to advocate for something different: an informal tax cooperation forum (TCF). Although this model has the appeal of enabling jurisdictions to identify those who share similar views and goals and work together on issues of common interest such as treaties, formulary apportionment, anti-avoidance rules, tax competition, tax harmonization, and dispute resolution, Magalhães questions the ability of such bodies to have any notable effect and create meaningful change given their envisioned informality.
The question, then, is what is left? What options can avoid the problems of the past and provide “a real space for political resistance, deliberation or empowerment”? Expanding on the efforts of some developing countries (including Bangladesh, China, India, and Singapore) to challenge the “status quo” of international tax policy, Magalhães encourages developing countries to pursue “counterhegemonic projects” and embrace “alternative epistemic communities.” The ultimate goal would be the “creation of a multipolar world order” with initial steps involving regional platforms and integration. To the extent that this alternative path anticipates reliance on its own set of experts, some of the issues with the global tax past risk replication, in particular the concern that political issues get framed as technical ones to be resolved by experts in a potentially nondemocratic fashion. Even if the experts create no democratic deficit in the tax policy design process, the group(s) must ultimately generate some discernible base of power in order to exert influence in global debates. It is certainly likely that by coming together they can strengthen their unified voice, but whether that voice is sufficient to be heard across the globe remains a question.
Magalhães offers an astute critique of current global tax policy-making that reaches beyond power and highlights the more subtle impact of framing and expertise. Even when these features of the process are not the product of calculated efforts, they can nonetheless combine to solidify a particular vision of international tax. Magalhães’ forthcoming work continues to explore these issues of global fiscal policymaking and promises continued insights in both understanding and in reforming global tax governance. I plan to stay tuned.
Dhammika Dharmapala, The Consequences of the TCJA’s International Provisions: Lessons from Existing Research
, CESifo Working Paper No. 7249 (Oct. 31, 2018), available at SSRN
The international provisions of the Internal Revenue Code are among its least well understood. Public Law 115-97, known informally as the “Tax Cut and Jobs Act” (TCJA), made significant changes to those provisions. One of the best evidence-based articles exploring the likely effects of those changes is Dhammika Dharmapala, The Consequences of the TCJA’s International Provisions: Lessons from Existing Research, CESifo Working Paper No. 7249, a second version of which was posted on SSRN in late October. In it, Dharmapala reviews the existing econometric literature and uses that literature to project the likely long-term consequences of those changes. Anyone interested in international tax policy will benefit from working through his evidence and conclusions.
Although Dharmapala initially defines his task in broad terms—“to review the most important of these new international tax provisions and to discuss their potential consequences, drawing on existing scholarly literature”—he ultimately narrows his focus to ownership distortions, distortions that implicate what is known in the literature as “capital ownership neutrality.” He does not, for example, explore generally the likely effects of TCJA on incentives to offshore business operations or incentives to income-shift within a consolidated group. Instead, he notes that pre-TCJA, (1) “US MNCs [multinational corporations] [were] disfavored as vehicles for global portfolio investment” and (2) “the US tax imposed upon the repatriation of dividends created an incentive to delay repatriation, and led to the accumulation of cash holdings…in foreign affiliates,” and asks whether the new changes are likely to ameliorate or exacerbate these distortions.
As to the first, he observes that “much of the impetus for international tax reform was spurred by concern about the US tax burden on US residence; a growing body of evidence suggested that the resulting distortions were quite large….Yet, the TCJA contrives to make this problem arguably even worse.” (By “US residence” he means US parentage of multinational groups.) The new tax on global intangible low-taxed income (GILTI), in particular, “burdens US residence, and…may do so to greater extent than the repatriation tax regime it replaces.”
The tax on GILTI, moreover, creates a new distortion: “The GILTI tax instead encourages US firms to acquire tangible assets in foreign countries, regardless of the local tax rate.” “US MNCs become tax-favored buyers of routine foreign tangible assets.” This violates capital ownership neutrality and creates dead-weight loss.
“In summary,” he concludes, “the TCJA may well increase the tax burden of US residence for many (and perhaps most) US MNCs. It follows that the TCJA is unlikely to generate the types of benefits documented in the empirical literature on the territorial reforms carried out in the U.K. and Japan. Rather, the impetus for inversions, the competitive disadvantage for US MNCs in cross-border acquisitions, and the tendency for US MNCs to be disfavored as vehicles for portfolio investment will continue (indeed, possibly to an even greater extent than before).”
As to repeal of the so-called repatriation tax, Dharmapala concludes that the “primary impact of increased repatriations is an increase in shareholder payout.” He bases this conclusion in significant part on his work on the effects of the 2004 repatriation tax holiday effected by the American Jobs Creation Act: “the AJCA [repatriation tax holiday] had no detectable impact on US investment or employment levels.” As a result, he concludes that “efficiency gains [from repeal of repatriation tax] are likely to be modest.” Importantly, he finds “no evidence supporting the claim that increased repatriations will increase US wages.”
The importance of having an economist with Dharmapala’s depth of knowledge and familiarity with the empirical literature writing about these issues cannot be overstated. I had reached similar conclusions using a purely theoretical model. Theodore Seto, Modeling Changes in U.S. International Tax Rules, Tax Notes, April 8, 2019. Theory, however, is never an adequate substitute for fact.
In his closing paragraph, Dharmapala concludes that “the TCJA provides an illustration of the definition of politics…as ‘the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Unfortunately, his analysis persuasively supports this rather bleak assessment.
- Wei Cui, The Digital Services Tax: A Conceptual Defense (Oct. 26, 2018), available at SSRN.
- Wei Cui & Nigar Hashimzade, The Digital Services Tax as a Tax on Location-Specific Rent (Jan. 23, 2019), available at SSRN.
Proposals from the European Council and the UK governments to introduce a digital services tax (DST) took those of us who haven’t been watching the field as closely as we should have by surprise. A DST might be levied on a revenue base, such as revenue from selling online advertising, intermediary services or data; at a low rate, perhaps 3%; on companies that exceed a size threshold, such as total revenue of 750 million euros. Coming in the wake of a protracted period in which the Organisation for Economic Co-operation and Development focused on negotiating arguably minor changes to the international tax framework (through the “base erosion and profit split” (BEPS) project), the DST seems to be moving like a high-speed train.
Scholars and policy makers have made efforts to justify (or contest) the normative underpinnings and economic consequences of the DST. In this context, two related papers—one by Wei Cui and Nigar Hashimzade and the second by Wei Cui—offer some helpful and novel analysis.
The major claim of both papers is that the DST can be justified as a means for taxing location-specific rents. The authors accept that other justifications (for example, destination-based apportionment or inter-nation equity concerns about source taxation) may also serve to support the tax; but they suggest that the location-specific rents justification might be more compelling to the DST’s critics.
For relative novices in this area of tax policy, Cui’s Conceptual Defense article offers a welcome entry point. Four aspects of that paper should be highlighted. First, Cui lays out the distinctive economic characteristics of digital platforms that affect their appropriate tax treatment: “(i) network effects that generate market power, (ii) two- or multi-sided business models that involve complex pricing choices in profit maximization, (iii) negligible marginal cost, and (iv) geographic mobility in the location of service delivery and profit recognition” (P. 3.) Cui accepts that these features justify considering new approaches to international taxation. He urges us to think not about whether a DST is appropriate, but instead to turn our attention to its best design.
Second, he calls on us to abandon some of the common tax treaty obsessions. Notably, he argues that expanding the scope for income tax treaties to cover DSTs (in Article 2) and fussing about the definition of permanent establishment (in Article 5) are unimportant diversions. I agree.
Third, he offers compelling rationales for the DST. It is a tax that captures location specific rents (which are created by digital platforms’ direct and indirect network effects). The taxation of advertising revenue is a form of designation-based formulary apportionment. And, the collection of data should be sufficient to generate a tax base. Elaboration of these arguments comprises a substantial portion of Cui’s Conceptual Defense paper.
Fourth, Cui’s paper throws into relief the difficulty of prioritizing a corporate profits tax with arm’s length allocations over a unilateral turnover tax (the DST) in this context.
Cui’s Conceptual Defense paper offers a good starting place for readers. It describes the current context and initiatives; for legal readers it highlights a few of the legal debates around the DST; and it opens the door to conversations about appropriate DST design in the light of alternative possible justifications.
The second paper, The Digital Services Tax as a Tax on Location-Specific Rent, is for more committed readers. Here, Nigar Hashimzade and Wei Cui turn to an extended rationalization of the DST as a tax on location-specific rent. In this paper, the authors analogize the tax to familiar taxes on natural resources. More boldly, they claim that when some conditions are met, the DST may be a better tax on location-specific rents than resource royalties. The paper offers a considerable economic analysis that may not be helpful for all law readers, but it is nevertheless possible to engage with much of the authors’ arguments even if parts of the paper are glossed over. Interestingly, the paper concludes with some nods to the inter-nation equity implications of the DST.
Cite as: Kim Brooks, Give the Digital Services Tax a Chance
(March 21, 2019) (reviewing
Wei Cui, The Digital Services Tax: A Conceptual Defense
(Oct. 26, 2018), available at SSRN.
Wei Cui & Nigar Hashimzade, The Digital Services Tax as a Tax on Location-Specific Rent
(Jan. 23, 2019), available at SSRN.
I am on alert for tax law changes as I teach Federal Income Tax this semester for the first time since the passage of the 2017 tax act. They seem to appear out of nowhere, rather than as part of a predictable pattern. What can explain seemingly disconnected provisions, scattered throughout the Code and enacted without an explicit policy explanation?
Linda Sugin takes on this question in The Social Meaning of the Tax Cuts and Jobs Act, published in 2018 at the Yale Law Journal Forum. Her critical perspective makes an effort to divine the worldview embedded in the TCJA based on the content of the enacted law. Sugin’s engineering effort shows the following “American priorities and values revealed by the TCJA:
- The traditional family is best;
- Individuals have greater entitlement to their capital than to their labor;
- People are autonomous individuals;
- Charity is for the rich; and
- Physical things are important.” (P. 404.)
Sugin reviews dozens of provisions to support her arguments. A sampling follows to offer a sense of her argument.
The TCJA, argues Sugin, reveals its traditional family bias through a number of provisions, including rate bracket changes and the replacement of the dependent care credit (helpful for two-working-parent families) with an increase in the generally-available child tax credit. Another change imposes a $500 fine on a tax preparer who fails to diligence a taxpayer’s claim of head of household status—a filing position designed to help low—and middle-income single-parent families. This last provision prompts tax preparers to be skeptical when a client says she is a single parent. No such incentive is presented when two clients say that they are married.
The TCJA’s preference for capital income over labor income is revealed by a reduced corporate income tax, as well as by the Section 199A deduction for 20% of so-called “qualified business income” earned through certain passthrough entities and subject to income phaseouts. Sugin similarly objects to the TCJA’s apparent preference for investments in physical capital rather than human capital, such as the provision for immediate expensing. She writes, “All of these changes favor things over people.” (P. 430.) Sugin’s point here is about morality, not about the efficiency problems that others have pointed out. She objects to the TCJA’s message that taxpayers have an inferior claim to the income from their own labor, relative to the claim to their income from physical or financial capital.
Sugin says that the people idealized and favored by the TCJA are autonomous economic units, not social humans embedded in networks of interactions like employment or state and local communities. Provisions including the passthrough deduction and the repeal of miscellaneous itemized deductions favor independent contractors over employers. Limiting the annual state and local tax deduction to $10,000 communicates that these taxes are a form of private consumption, rather than a tithe to a common fund. Increasing the standard deduction exacerbates the result that only higher people will get any incremental benefit from charitable donations and “undervalues the types of institutions supported by the poor.” (P. 426.)
Sugin is surely right to say that “efficiency is a value” (P. 405) and to point out that law cloaked in the garb of efficiency or competitiveness nevertheless has social meaning. This legislation has winners and losers, even if rhetoric about efficiency obscures this fact. Perhaps legislators did not willfully intend to favor swashbuckling primary-earner investors with stay-at-home spouses, rather than risk-averse single-parent employees. Nevertheless, Sugin shows results that are there, enacted in the statute. As Sugin points out, the law itself communicates values and reveals over time its embedded social meaning.
Jacob Goldin, Tax Benefit Complexity and Take-Up: Lessons From the Earned Income-Tax Credit
, available at SSRN
One dilemma for policymakers is how to get people to take advantage of social welfare programs. In the case of the Earned Income Tax Credit (“EITC”), the goal is to encourage eligible individuals to claim the credit on their tax return. Take-up rates for the EITC are quite good (about 80% overall), but ideally would be higher. Typically the approach to increasing EITC take-up is information campaigns, like EITC awareness day. The conventional wisdom has been that the more people know about the EITC, the more likely eligible recipients are to claim it. But is it right that advance notice is important? If people use tax software that will automatically calculate the EITC for them, how important is it that they are made aware of the benefit ahead of time? Perhaps not very, as suggested by Jacob Goldin in his forthcoming article, Tax Benefit Complexity and Take-up: Lessons from the Earned Income Tax Credit.
The key insight from Goldin’s article is that in the modern age, virtually anyone who files a tax return is presented with the opportunity to claim the EITC. This is because the vast majority of taxpayers—96 percent in 2015 according to Goldin—use assisted preparation methods (“APMs”) such as self-preparation software or a tax return preparer. Using either of those methods, it is extremely unlikely to fail to claim the credit accidentally. (Though, as Goldin notes, some taxpayers may consciously choose not to claim the credit even though they are eligible.) The paper’s main conclusion is logical yet important: people who are eligible for the EITC but who fail to claim it are generally people who fail to file returns at all. Thus, if policymakers want to increase EITC take-up, they must increase the filing rate.
Goldin frames the article by analyzing the complexity of the EITC. In doing so, he introduces a novel and important taxonomy into the tax literature that is useful beyond the specific context of the EITC. Goldin’s taxonomy distinguishes between “informational complexity” involved in claiming tax benefits and “computational complexity.” Informational complexity involves the level of difficulty in compiling the inputs for claiming a benefit, both in terms of how much information is required and how hard it is to compile the information. For example, the EITC requires information about age, income, marital status, dependents, and several other inputs. On the other hand, computational complexity describes the difficulty in actually calculating the taxpayer’s eligibility for the credit and determining the amount of the credit. For example, determining whether a minor is a qualifying child, and applying the credit’s phase-in or phase-out rules, are both part of the EITC’s computational complexity.
Tax benefits might have high levels of one type of complexity and low levels of another. For example, as explained by Goldin, the charitable deduction is easy to calculate (low computational complexity), but may have high informational complexity because it requires taxpayers to keep good records of what donations they have made during the year. The EITC, Goldin argues, is low in informational complexity because the information required is easily knowable by taxpayers (e.g., age and marital status), easy to obtain if not already known, and is often already required for other purposes on the tax return. The computational complexity of the EITC, on the other hand, is quite high.
The EITC’s classification as low informational complexity/high computational complexity is important because computational complexity is easily overcome by APMs. Software used either on a self-prepared return or by a tax return preparer will calculate the amount of the EITC in seconds once the required inputs are provided. Thus, Goldin concludes, computational complexity should not be a barrier to take-up for anyone filing a return with an APM (i.e., the vast majority of people filing returns). Similarly, informational complexity should not be a barrier because, although APMs do not eliminate informational complexity, informational complexity is low for the EITC.
Important policy prescriptions flow from this analysis. First, Goldin argues, efforts to increase EITC take-up should focus on increasing the filing rate among taxpayers who are eligible to claim the EITC and who do not otherwise file. Relatedly, efforts to raise EITC awareness are probably ineffective at increasing take-up, except to the extent those efforts encourage return filing among non-filers. Further, Goldin argues, current EITC awareness campaigns are unlikely to increase the filing rate among eligible non-filers because awareness of the credit does not help taxpayers understand if they would be eligible and what the amount of their refund would be. This is consistent with research showing that mandatory employer notices of the EITC are not linked to higher take-up rates.
How should we encourage EITC-eligible non-filers to file? Goldin’s article offers a number of creative proposals here aimed at increasing the actual or perceived benefit of filing. For example, one approach would be to alter the withholding tables so that taxpayers eligible for the EITC would be owed a bigger refund at the end of year, thus increasing the economic benefit of filing. One potential drawback to this approach, though, is that EITC-eligible taxpayers are more likely to experience liquidity problems during the year from over-withholding. Another possibility would be to limit government programs that offset tax refunds (e.g., programs that automatically divert tax refunds towards things like child support obligations), since these programs likely deter eligible claimants from filing a return. However, as acknowledged by Goldin, limiting these programs would undermine the policy goals of those programs (e.g., making sure child support obligations are paid).
Yet another approach would be to increase awareness of free preparation assistance (e.g., VITA programs and the IRS’s FreeFile program). Goldin acknowledges that these free programs have some drawbacks and programs like VITA may need to be expanded if the number of low-income filers significantly increased. Other forms of information may also encourage more eligible taxpayers to file and claim the EITC. For example, if taxpayers currently perceive the monetary benefit from filing to be too low, providing taxpayers with more personalized estimates of their potential refund amount may increase filing rates. The unifying theme here is that these informational campaigns would be aimed at increasing awareness of the benefits of filing, as opposed to awareness of the credit itself.
Increasing EITC take-up by increasing awareness of the credit itself made sense in previous decades. As Goldin points out, about one-third of taxpayers self-prepared their returns in 1998, making it more likely that eligible filers would fail to claim the EITC on their returns. But due in large part to the prevalence of tax preparation software, the number of taxpayers filing without some preparation assistance is approaching zero. As the tax return preparation landscape changes, so must our approach to encouraging eligible individuals to claim social welfare benefits through the tax system. Goldin’s article, and his focus on taxpayers’ filing rate, provides important guidance to the IRS and policymakers in this regard.
Clint Wallace, Congressional Control of Tax Rulemaking,
71 Tax L. Rev.
179 (2017), available at SSRN
In its 2011 decision in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court held that most if not all general authority Treasury regulations carry the force of law and, thus, are eligible for judicial review and deference under the Chevron standard. In reaching that conclusion, the Court reiterated its general presumption in favor of “maintaining a uniform approach to judicial review of administrative action” and, correspondingly, rejected “an approach to administrative review good for tax law only.” But the Court qualified that presumption at least a bit—noting the taxpayer’s failure to “advance any justification for applying a less deferential standard of review to Treasury Department regulations,” and thereby suggesting that good reasons for tax exceptionalism might exist on another occasion. With Congressional Control of Tax Rulemaking, Clint Wallace advocates at least some amount of tax exceptionalism in judicial review of Treasury/IRS regulatory interpretations of the Internal Revenue Code. Or does he?
In the wake of Mayo, scholars writing about tax administration have divided loosely into exceptionalist and anti-exceptionalist camps. The exceptionalists may not reject Mayo’s particular holding, but they otherwise prefer the pre-Mayo status quo and seek to justify tax exceptionalism from one or many administrative law requirements, doctrines, or norms. The anti-exceptionalists see independent value in bringing tax administration more into line with general administrative law, so they would impose a higher bar—e.g., an affirmative statement of congressional intent—before permitting tax exceptionalism. Obviously, this characterization is over-generalized, as it is more accurate to portray exceptionalism and anti-exceptionalism as two ends of a continuum rather than a pure binary choice. Still, much scholarship in this area adopts a tone and reflects assumptions and preferences that clearly lean one way or the other. And yet, although Wallace’s article advances an exceptionalist argument, to the eye of this anti-exceptionalist writer, his reasoning and analysis suggest that the two camps may not be so far apart after all—at least not with respect to statutory interpretation.
Moreover, regardless of which camp one falls into, it is undeniable that exceptions from general administrative law principles abound across the administrative state. Every agency is at least somewhat unique. Preventing rampant exceptionalism from completely undermining the general policy of administrative law uniformity requires comparative evaluation of which differences—whether in terms of statutory requirements and responsibilities, agency design, or administrative practices—should matter and which should not. Undertaking that sort of comparative evaluation requires identifying the differences (and recognizing the similarities) among agencies in the first place. Relatively little legal scholarship exists to serve that function. Wallace’s article helps to fill that void, most especially in its discussion of the role of the Joint Committee on Taxation in the tax legislative process.
Wallace starts with the premise that the first goal of general administrative law requirements, doctrines, and norms is to promote political accountability in the modern administrative state. He then focuses on two particular doctrines—Chevron and State Farm—that judges use in evaluating agency regulations, and two key aspects of tax administration that he says make tax administration unique and justify approaching judicial review of Treasury regulations differently.
First, Wallace examines and emphasizes the role of the Joint Committee on Taxation and its staff in the tax legislative process and, relatedly, in helping Congress provide an unusual level of guidance to tax administrators in the form of greater statutory specificity and more elaborate legislative history. As a result, and citing a study by David Epstein and Sharyn O’Halloran, he posits that Congress delegates less discretionary authority to Treasury and the IRS than it does to other government agencies. Thus, Wallace concludes, “the JCT facilitates congressional control of tax rulemaking, which can provide political accountability, allows for reliance on expertise in policy formulation, and can provide benefits in terms of certainty for taxpayers.”
Second, Wallace examines public participation in notice-and-comment rulemaking in the tax context—documenting and evaluating public comments received in response to 106 notices of proposed rulemaking issued by the Treasury Department in 2013, 2014, and 2015. Most of the proposed Treasury regulations received few comments, and a quarter received no comments at all. When comments were received, the commenters “were heavily weighted towards private interests” as determined based on their identity, although Wallace acknowledges “[s]cholars have found—and expressed concerns about—low public interest participation in rulemaking undertaken by other agencies.” Also, citing anecdote, he suggests also that comments from taxpayers “describe the effects of” proposed Treasury regulations “in service of avoiding higher tax liability” rather than providing “useful data or insights to inform the rulemaking process.” From this evidence, Wallace concludes that “the notice and comment process does not elicit broad and diverse participation” and “is most often a poor mechanism for achieving key normative goals of administrative law in the tax regulatory process.”
Based upon these two aspects of tax legislation and administration, Wallace proposes the courts adopt a “‘JCT Canon’ for construing congressional delegations to Treasury.” The proposed JCT Canon calls upon both Treasury and the courts to follow or give extra weight to JCT-produced legislative history as “a good indicator of how members of Congress resolved and understood various issues” and as evidence of “congressional directive” in interpreting the Internal Revenue Code. Wallace contends that reliance upon the JCT Canon would better provide the political accountability that administrative law seeks.
Wallace’s article is tremendously useful for its elaboration of the tax legislative process and its analysis of who participates in commenting on proposed Treasury regulations. And, as suggested above, despite Wallace’s exceptionalist tone, his conclusions may be less exceptionalist than they appear at first blush for several reasons.
Whether tax or nontax, if the meaning of a statute is clear, Chevron step one calls for courts and agencies alike to respect the clearly expressed intent of Congress. Where JCT involvement in tax legislative drafting yields clearer and more specific statutory text, Chevron step one would call for courts to follow that text and, correspondingly, to uphold any Treasury regulations that reiterates it. Additionally, courts sometimes utilize subject matter specific canons—e.g., those favoring veterans or Native Americans—in conjunction with Chevron analysis. Even in its strongest application, Wallace’s JCT Canon would be consistent with that strand of Chevron jurisprudence.
Textualists likely will be skeptical of treating JCT-produced legislative history as completely synonymous with legislative intent, and few judges will embrace a JCT explanation that seems in conflict with statutory text. But all but the most ardent textualists take legislative history into account to some degree in evaluating statutory meaning. A couple of circuits will only consider legislative history in assessing reasonableness at Chevron step two, but most courts will consider legislative history in evaluating statutory clarity at Chevron step one. As Victoria Nourse has argued, one cannot really properly evaluate legislative history without a solid appreciation of how the legislative process actually works. To the extent that the tax legislative process deviates at least somewhat from the norm for other types of legislation, courts ought to be made aware of that deviation. Wallace’s article serves that function. Again, however, this suggestion seems consistent with a nuanced understanding of Chevron analysis, rather than a deviation from it.
Where the statutory text is less than clear, Chevron step two calls for courts to defer to reasonable agency interpretations thereof. The Supreme Court has never clearly explained exactly what makes an agency’s interpretation reasonable or unreasonable for this purpose. State Farm doctrine requires agencies to contemporaneously document the justifications for their actions. Some courts have invoked State Farm in conjunction with Chevron step two, looking for agencies not only to adopt interpretations that statutory text, history, and purpose can plausibly accommodate but also to explain their reasons for choosing one permissible interpretation over another. Other courts limit Chevron step two to whether statutory text, history, and purpose can plausibly accommodate the agency’s interpretation, and evaluate State Farm’s reasoned decisionmaking requirement as a completely separate issue.
Regardless of whether Chevron step two and State Farm analysis are separated or combined, if JCT-produced legislative history elaborates ambiguous statutory text, and Treasury regulations incorporate that explanation, then unless the legislative history flatly contradicts the statute’s text (and why would it?), courts are likely to look favorably upon consistency between the JCT’s account and the regulations. Correspondingly, if Treasury regulations are inconsistent with the JCT-produced legislative history, then courts are likely to expect Treasury and the IRS to explain and justify the discrepancy in evaluating reasonableness under either Chevron step two or State Farm (and rightly so!). In sum, irrespective of whether they use the JCT Canon label, courts are likely to approach Chevron and State Farm analysis in a manner consistent with Wallace’s JCT Canon.
Lastly, Wallace is absolutely right to be concerned about the quality and scope of public participation in the rulemaking process. Administrative law scholars and specialists across the regulatory spectrum fret about underparticipation by members of the general public in the rulemaking process. They look for ways to facilitate and encourage broader participation. They also contemplate whether and how agency decisionmaking should be influenced by or take into account the breadth and caliber of public participation. Wallace’s empirical analysis adds meaningfully to that discussion. Even in the context of State Farm analysis, courts have been less inclined to take these issues into account in evaluating agency reasonableness. Perhaps Wallace is correct that they should give such issues more weight in evaluating agency action. Again, however, as Wallace acknowledges, it is far from clear that tax is exceptional in this regard.
Exceptionalism versus anti-exceptionalism aside, Congressional Control of Tax Rulemaking is simply a wonderful addition to the tax administration literature and well worth reading for both tax and nontax scholars alike. Wallace’s article gives me hope that exceptionalists and anti-exceptionalists can find common ground as tax administration continues down the path of greater integration with general administrative law requirements, doctrines, and norms.