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How Pigouvian Taxes Work on Sellers, and Why We Should Care

Kyle Rozema, Supply Side Incidence of Consumption Taxes (Oct. 5, 2016), available at SSRN.

Empirical testing of the tax laws, and in particular testing the incidence of the tax laws, may sound boring. But virtually any modern public policy goal that could be implemented through tax policy ultimately turns precisely on this question. For example: Should the United States adopt a tax on sugary drinks? Is a high cigarette tax effective in preventing smoking deaths? Would a carbon tax help to reduce global warming? Ultimately, the answers to these questions turns on who, in fact, ends up bearing the burden of these taxes.

Such proposals often represent forms of so-called Pigouvian taxes. Proponents of Pigouvian taxes support them by contending that they can be used to reduce inefficient behavior by forcing consumers to internalize the full costs of such activities. Opponents of Pigouvian taxes often point to the regressive effect of such taxes on consumers, because they increase the cost of goods by a fixed amount of taxes, which disproportionately harms those consumers least able to afford such taxes. A fair amount of literature has arisen to resolve this question, primarily focusing on the empirical question of whether increasing the price of certain goods through higher taxes in fact reduces the amount of consumption and who bears the costs of such taxes. Virtually none of the literature in this area asks a related, but equally important, question: how do Pigouvian taxes impact different types of sellers of such goods?

Kyle Rozema provides one of the first attempts to address precisely this question in his article Supply Side Incidence of Consumption Taxes. More specifically, Rozema asks: How does a cigarette tax affect sellers of goods, as opposed to buyers of goods? The question matters because if the purpose of the cigarette tax was to serve as a Pigouvian tax, it would work only if it actually increased the price of cigarettes to consumers. Ultimately, however, the behavior of both buyers and sellers determines the equilibrium price of the goods. As an initial matter, this seems like an obvious question. After all, a Pigouvian tax works by charging more for a good which, in turn, should reduce demand (depending on the shape of the demand curve). But what if sellers don’t, in fact, raise prices in response to the tax? Even worse, what if some do and some don’t? As becomes readily apparent, taxes that are not fully passed on through retail prices would be less effective at reducing consumption, thereby undermining the purpose of a Pigouvian tax in the first place.

For example, if the government were to charge a tax on sales of sugary drinks of $.05 but the retailer does not increase the price of the drink, was the Piguovian tax effective? The tax did make it more expensive for the retailer to sell the drink, but it did not make it more expensive for the consumer to buy the drink. Is this the intended result? In determining whether to adopt a Pigouvian tax in the first place, should it matter whether the tax would ultimately be borne by the buyer or seller? There is little hard evidence to answer these questions. In particular, empirically testing the effects of Piguovian-type taxes on the supply side of the analysis has proven particularly difficult due in part to a lack of sufficiently fine-grained data. The result is often the adoption of Piguovian taxes based on little more than intuition about the incidence or resorting to one’s normative priors.

Rozema’s primary contribution is to challenge the assumption that all sellers bear an equal burden of such taxes by compiling a unique dataset of actual sales by different retailers of cigarettes based on data compiled by actual scans of UPC codes at the register. In this manner, Rozema can obtain a glimpse not only of the macro-level effects of total consumption of cigarettes but also on the more micro-level effect of whether and to what extent the tax decreased sales at the register for different types of retailers and the amount of profits on such sales. By utilizing more precise data, Rozema unveils a more complex and nuanced picture of Pigouvian taxes. His analysis finds that a rise in the cigarette tax can result in different consequences for different types of retailers. In particular, he finds the effect of broad-based cigarette taxes on actual registered sales was to increase the price at most large drug and grocery stores but not to do so at convenience stores and other small retailers.

Why would this result be so important? Return to the sugary drink hypothetical above. Assume the goal of a tax on sugary drinks is to reduce the consumption of sugar in society. Now assume that Rozema’s findings apply equally to sugary drink taxes as to cigarette taxes. This could mean that people would buy fewer sugary drinks at gas stations and convenience stores, but this reduction would be offset by greater sales of sugary drinks at grocery stores or warehouse stores (for example, where bulk discounts are available). Alternatively, Rozema’s results could mean that gas stations and convenience stores would not increase retail prices but instead such sellers would absorb the cost of the tax, resulting in little to no reduction in consumption of sugary drinks at such retailers. Either way, what results is a distributional distortion among retailers rather than the desired Pigouvian effect of reducing consumption. Even worse, Rozema proposes that not only is there a distributional effect, when one was not anticipated, but that the effect could in fact prove regressive to the extent it tends to hurt smaller retailers over the larger retailers.

Rozema’s results are striking. Not only do they provide new insights in an area where many may have thought empirical analysis would be impractical, but they also potentially challenge many of the theoretical foundations underlying the use of Piguovian taxes. Rozema’s paper represents some of the best of what empirical tax research can and should do. It looks to an important area of tax and public policy, finds a significant gap in the micro-foundations for such policy, and uses a creative and novel data to begin to address that gap. Rozema attempts to shed light on the issue and clarify the trade-offs inherent in adopting Pigouvian taxes not only from a consumption side but also from a supply side.

While this review might still not have convinced many readers that empirical analysis of the incidence of taxes is not boring, keep these results in mind the next time you find yourself at a cocktail party debating whether the government should adopt an additional tax on liquor or wine. Maybe then empirical tax studies won’t seem so boring after all.

Cite as: Adam Rosenzweig, How Pigouvian Taxes Work on Sellers, and Why We Should Care, JOTWELL (February 9, 2017) (reviewing Kyle Rozema, Supply Side Incidence of Consumption Taxes (Oct. 5, 2016), available at SSRN),

Thoughts On Statutory Interpretation—For Tax Specialists, Too

Tax specialists are no strangers to the exercise of statutory interpretation. The Internal Revenue Code is an enormously complex statute, with all of the overlapping provisions, competing goals, and specificity interspersed with ambiguity that one would expect to accompany that complexity. And mastering the tax policy aspects of the Code is hard enough that tax specialists might be forgiven for reducing the exercise of statutory interpretation to short statements about considering the Code’s text, history, and purpose, or the “spirit” of the tax laws. A recent exchange between two prominent federal judges—Chief Judge Robert Katzmann of the Second Circuit and Judge Brett Kavanaugh of the D.C. Circuit—and the lengthier books highlighted within their exchange offer a highly readable reminder of the parallel complexity of statutory interpretation theory and jurisprudence. Tax specialists interested in seeing their policy preferences succeed in the real world would do well to take note.

Although tax specialists often like to think of the tax laws as unique, judges in tax cases routinely rely upon and debate about the same tools of statutory construction that they apply and discuss in interpreting other statutes. Consider just one particularly expansive example. In Rand v. Comm’r, 141 T.C. 376 (2013), deciding that refundable credits like the earned income tax credit reduce “the amount shown as the tax by the taxpayer on his return” when computing the underpayment penalty under § 6662 and 6664, Judge Ronald Buch discussed the consistent usage canon, the expressio unius canon, the surplusage canon, and the rule of lenity, in addition to the Chevron and Auer standards of review. Judge David Gustafson in dissent maintained that proper application of the rule of lenity supported the opposite conclusion. Judge Richard Morrison, dissenting separately, criticized Judge Buch’s opinion for relying too heavily on the consistent usage canon and ignoring relevant legislative history. (Congress subsequently amended § 6664 to clarify its intent.) Also, Carpenter Family Investments, LLC v. Comm’r, 136 T.C. 373 (2011)—one of the cases leading up to the Supreme Court’s decision in United States v. Home Concrete that basis overstatements are not omissions of an amount from gross income under §§ 6229(c)(2) and 6501(e)(1)(A)—includes an interesting exchange between Judge Robert Wherry for the majority and Judges James Halpern and Mark Homes in concurrence over whether unique attributes of the tax legislative process are relevant when considering legislative history in tax cases. And in Yari v. Comm’r, 143 T.C. 157 (2014), in interpreting the phrase “tax shown on the return” in connection with the § 6707A reportable transaction penalty, Judge Robert Wherry referenced several canons, discussed at some length which documents were relevant as legislative history, and observed further that “the process of divining the legislative intent underlying a statute’s language and structure, while subject to canons of construction and well-established methodologies, is hardly an exact science.”

In a sense, Katzmann’s and Kavanaugh’s conversation about statutory interpretation theory and jurisprudence started when Katzmann published the well-received Judging Statutes in 2014. For that matter, although not styled precisely as such, Katzmann’s book could be read as responding to the also-acclaimed Reading Law: The Interpretation of Legal Texts, published by the late Justice Antonin Scalia and Professor Bryan Garner in 2012. As good textualists, Scalia and Garner rejected legislative history and emphasized semantic canons like the whole act rule and substantive canons like the rule of lenity. By comparison, Katzmann offered a robust and scholarly defense of legislative history as instructive in discerning congressional intent. As a key part of his argument, Katzmann contended that courts (and the rest of us) need to understand better how Congress operates in order to use legislative history appropriately.

In his review of Judging Statutes, Kavanaugh accepts the proposition that legislative history may be useful in resolving textual ambiguity. But he objects to relying on legislative history to override clear statutory text in the vein of Church of the Holy Trinity v. United States, 143 U.S. 457 (1892), and he criticizes Katzmann for failing to make that distinction. Kavanaugh observes further that many canons of statutory construction (including the “canon” of relying on legislative history to clarify textual ambiguity) “depend on an initial evaluation of whether statutory text is clear or ambiguous,” and he describes at some length why it is often difficult to determine where textual clarity ends and textual ambiguity begins. He suggests, therefore, that courts should reduce their reliance on those canons that turn on a threshold finding of textual ambiguity and instead “seek the best reading of the statute.” Kavanaugh offers ways in which several traditional tools of statutory construction that turn on the clarity/ambiguity distinction—from the application of legislative history to the Chevron standard—might be reframed to better facilitate the search for congressional intent. Other canons, like anti-consistency and consistent usage, he suggests using cautiously. Ejusdem generis, he suggests tossing outright.

In his response to Kavanaugh’s review, Katzmann first clarifies that he did not intend to suggest a return to Holy Trinity’s reliance on legislative history to override clear statutory text, but rather merely “to highlight the challenges of the interpretive task and approaches to addressing that challenge.” Katzmann also lauds Kavanaugh’s efforts to explore “how canons can be better employed as interpretive rules of the road . . . freed from an inquiry into ‘ambiguity.’” But Katzmann then poses a series of questions suggesting, for example, that seeking the best reading of a statute is what judges already do, and also that debates over clarity versus ambiguity and disagreements over best reading are both legitimate and inevitable whenever the words of a statute are not explicit.

In the end, Katzmann and Kavanaugh agree on critical starting points. Both start from the premise that the role of a judge (and, thus, anyone trying to read a statute) is to discern and comply with congressional intent. Both begin the interpretive process with statutory text. To quote Justice Kagan, as Kavanaugh does in his review, “we’re all textualists now.” Both Katzmann and Kavanaugh agree, though to substantially different degrees, that legislative history has a role to play in discerning congressional intent. But they disagree significantly over many of the details, wherein of course lies the devil.

This sophisticated conversation between Katzmann and Kavanaugh is a must-read for tax specialists for a couple of reasons. As sitting federal appellate court judges, Katzmann and Kavanaugh together offer a bird’s eye view into real-world judicial decisionmaking.  Yet Katzmann’s book, Kavanaugh’s review, and Katzmann’s response not only offer examples from case law, but also draw extensively from the latest scholarship on statutory interpretation. Nevertheless, maybe because they are judges rather than scholars, Katzmann and Kavanaugh have made their conversation clear and easy to read, and thus accessible for audiences who are not so interested in a deep dive into that scholarly literature. Highly recommended for busy tax specialists who appreciate that they need to think more about statutory interpretation but want to get back to debating tax policy!

Cite as: Kristin Hickman, Thoughts On Statutory Interpretation—For Tax Specialists, Too, JOTWELL (January 4, 2017) (reviewing Brett M. Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118 (2016) and Robert A. Katzmann, Response to Judge Kavanaugh’s Review of Judging Statutes, 129 Harv. L. Rev. F. 388 (2016).),

Real-World Tax Screening

Emily Satterthwaite, Tax Elections as Screens, Queen’s L. J. (forthcoming 2016), available at SSRN.

The concept of “screening” taxpayers is theoretically appealing. According to optimal tax theory, our tax system should impose tax liability based on ability, which is a characteristic that reflects relative well-being. However, since ability cannot be directly observed, the tax system has to rely largely on income, a presumed surrogate of ability, as a tax base. The problem is that income is easily manipulable, making the tax system an inefficient tax on ability. Screening is a potential, partial solution to this problem. Screening involves relying on other characteristics that are more revelatory of ability. For instance, as it turns out, height is surprisingly strongly correlated with earning ability. However, as theoretically appealing as screening may be, the discussion of it is generally politically unrealistic enough, or sufficiently divorced from the realities of the actual tax system, to make it a largely academic exercise.

In Tax Elections as Screens, Emily Satterthwaite gets beyond the theoretical possibilities of screening taxpayers. She does so by examining how an existing tax election—the election to itemize deductions—can serve as a screening mechanism. By examining how screening may work in our actual tax system, Satterthwaite offers an important contribution that has few companions in what is a largely theoretical field.

Satterthwaite begins by offering a simple model of the potential value of tax elections. She then goes on to illustrate what practical information the election to itemize may offer the government. She marshals evidence from an empirical study that, for taxpayers with income below $58,000, a taxpayer’s cost of itemizing cannot be inferred from observable characteristics on the taxpayer’s return (such as gross income). As a result, Satterthwaite posits that the election to itemize may reveal otherwise unobservable information about this income group.

Specifically, Satterthwaite posits that the election to itemize can reveal information about earning ability, how responsive a taxpayer is to taxation, and a taxpayer’s compliance posture. She then makes suggestions about how each of these various possibilities might shape tax policy. First, a taxpayer who is more conscientious is likely to have higher earning ability, and is also likely to face lower costs to engage in all of the tasks required to itemize (such as collecting, saving, and using deduction records). Satterthwaite suggests that the government may use this information to target various forms of assistance to non-itemizers, who are more likely to need it. Alternatively, a taxpayer may be more likely to itemize because the taxpayer is more responsive to incentives that reduce taxation, a quality that means the taxpayer is correspondingly likely to be more tax-elastic on other dimensions (for example, being more likely to change labor, savings, and other behavior in order to reduce tax liability). Satterthwaite suggests the government may therefore want to target higher marginal tax rates to non-itemizers, based on their low elasticity. As a final possibility, taxpayers who are more likely to itemize may also be more likely to take other steps (including aggressive tax reporting positions) to reduce tax liability. The government may therefore want to target more enforcement and auditing resources toward itemizers.

However, as Satterthwaite acknowledges, the analysis of exactly what the government should do in response to a taxpayer’s decision to itemize is quite complex. A taxpayer may be itemizing for any or all of the three reasons she posits (i.e., because the taxpayer is more conscientious, has lower tax-elasticity, or has a more aggressive compliance posture). What the government should do depends on the taxpayer’s dominant motive. For instance, if the taxpayer is itemizing because the taxpayer is more conscientious, the government would theoretically want to impose a higher rate of taxation (or the equivalent through higher auditing or the like) in response to the taxpayer’s higher ability. However, if the taxpayer is itemizing because the taxpayer is more tax elastic, this would be the exact wrong result. Ferretting out why the taxpayer is itemizing, all else being equal, would be difficult. Indeed, knowing whether a taxpayer is itemizing because the taxpayer has lower costs from itemizing, or just has more deductions, would itself be a difficult task. As Satterthwaite also acknowledges, determining whether it makes sense to introduce itemizing as a screen also presents other estimating difficulties, such as estimating the compliance costs of the election.

Despite these difficulties, Satterthwaite’s insights are important. First, whether optimal or not, the tax code does provide an election to itemize deductions. As a result, Satterthwaite does not need to prove that introducing itemizing as a screen is welfare enhancing. Rather, she merely needs to show that, given that the election is already in place, the election can provide the government valuable information. And she succeeds in this task. Perhaps the most useful insight is Satterthwaite’s suggestion that the government may use the failure to itemize (and the likely higher cost of itemizing) to target other assistance to the taxpayer, such as help preparing a tax return or enhanced information about government benefits that are provided through the tax code, such as the earned income tax credit. This suggestion is particularly helpful because, even without being able to determine definitively why a taxpayer failed to itemize, the government can reasonably imagine that a non-itemizing taxpayer is likely to be less well-informed or sophisticated in preparing government forms than a taxpayer who itemizes. Targeting greater assistance to the former than the latter may create welfare improvements at a low cost. Moreover, the suggestion harnesses information that can be gleaned from tax filing behavior to help improve the administration of unrelated welfare benefits that, whether rightly or wrongly, are already being provided through the tax code. This sensible, incremental improvement arises out of Satterthwaite’s real-world tax policy approach. This approach, which has much to commend it, merits more scholarly attention.

Cite as: Leigh Osofsky, Real-World Tax Screening, JOTWELL (November 28, 2016) (reviewing Emily Satterthwaite, Tax Elections as Screens, Queen’s L. J. (forthcoming 2016), available at SSRN),

Trojan Horse, or Merely a Mask for the Costume Ball?

Edward Kleinbard, The Trojan Horse of Corporate Integration, 152 Tax Notes 957 (Aug. 15, 2016), available at SSRN.

Edward Kleinbard’s The Trojan Horse of Corporate Integration critiques the U.S. Senate Finance Committee’s current proposal for corporate integration. This is an important read for those who have not yet come to grips with the forces at play in contemporary tax policy. Kleinbard refers to these forces as the “political economy agenda” behind the proposal. That agenda has as much to do with appearances relating to tax liabilities as it does with any cash actually being paid.

Most tax policy analysis has historically assumed that it is the amount of tax that is actually paid that matters most. Taxes paid are resources that are no longer available to the private sector; taxes not paid are not available to the public sector. At bottom, the tax policy challenge has usually been seen as balancing the deadweight losses that are inevitable with resources taken away from the private sector with the market failures associated with leaving deployment of all resources in private hands. This view of the impact of taxes is all well and good for economists to theorize about, but does not capture very much of the political decisions taking place in the real world about the type of taxation that should be adopted.

As Kleinbard points out, a significant portion of the “political economy agenda” behind the Senate Finance Committee proposal is simply to allow corporations to report paying lower taxes for financial accounting purposes, without lowering the overall taxes paid on corporate investment. The Senate Finance Committee proposal would do this by allowing a corporation to deduct from its tax base dividends paid from corporate income. But even as it allows the corporation this “dividends paid deduction” (DPD), the proposal would require the corporation to withhold tax from the dividends actually distributed to the shareholder. This withholding tax would not be treated as a liability of the corporation, and therefore would not be included in the corporation’s financial accounting reports reflecting the taxes it pays. Thus, the taxes imposed at the corporate level would be reduced, even though the total taxes on corporate earnings (taking into account both the tax on corporate income and the withholding tax) may not be.

The equivalence between the collection of taxes paid by a corporation on its own behalf and the taxes paid by the corporation as unrefunded withholding taxes remains uncertain. It will depend on many features relating to the design of the tax (including the preservation of tax exemption for certain domestic taxpayers and any mechanism available for credits for foreign taxpayers).

As Kleinbard also points out, the DPD often produces a similar result as the imputation credit approach to corporate integration, since in both approaches a payment made by the corporation is credited against the shareholder’s tax liability. In fact, the DPD approach may often produce greater tax liabilities if the withholding scheme does a poorer job than the credit imputation scheme of taking into account the particular characteristics of shareholders, including tax exempt or foreign status. (Incidentally, Kleinbard’s piece is a good place for those having lost track of the complexities of integration design to get back up to speed.)

But the DPD, unlike the imputation credit approach, would also have the salutary effect, from a political economy point of view, of making the burden of taxes on investments in US corporations appear to be less because the withholding tax would not be treated as a corporate tax for financial accounting purposes. Kleinbard intimates that no one should consider this as an actually accomplishing anything different. After all, he asks, “how stupid are we?”

The relevant research is still in progress, but at least some of it suggests that many groups of suppliers of capital may actually be that stupid, at least in the sense that the way that taxes are reported for financial purposes is important independently of the amounts ultimately paid. This may be true if the focus is on management incentives and perhaps even if the focus is on investor behavior.   Kleinbard’s explication of this phenomenon is a good first step in helping the rest of us see the implications.

Kleinbard is especially dismayed at the possibility that the DPD would allow, more cleanly than other forms of integration, repatriation and distribution of the foreign income of US multinationals that has only been lightly taxed, if taxed at all, in any foreign jurisdiction without any additional corporate tax. This possibility is the not-so-very-well-hidden secret in the DPD approach to integration. Kleinbard does seem to acknowledge that this change could break the log jam that has previously blocked progress in corporation tax reform. But he decries the breaking of the log jam as wasting a chance to do something more significant.

We probably are not so stupid as to not see the political economy behind the DPD. But the best part of the Kleinbard contribution is its capacity for pointing out that we could really be that stupid when it comes to more generally neglecting the importance of the appearance of tax burdens rather than the burdens themselves. There is a real possibility that analysts and the investors they serve may respond favorably to the reporting of lower corporate taxes, even though investors’ overall burdens will not be reduced. Although Kleinbard takes no view on whether and when such responses dominate over actual tax payments, he reminds us well that we cannot ignore such possibilities when implementing corporate tax reform.

Cite as: Charlotte Crane, Trojan Horse, or Merely a Mask for the Costume Ball?, JOTWELL (October 27, 2016) (reviewing Edward Kleinbard, The Trojan Horse of Corporate Integration, 152 Tax Notes 957 (Aug. 15, 2016), available at SSRN),

Telling the Middle Class How to Be Middle-Class: Tax Incentives for Saving

Lisa Philipps, Registered Savings Plans and the Making of Middle Class Canada: Toward a Performative Theory of Tax Policy, 84 Fordham L. Rev. (forthcoming 2016), available at SSRN.

Analyses of tax policy are typically based on a familiar cost-benefit framework. There are important debates about which costs and benefits should be included (and which are measurable), but the standard formula is simple: (1) Describe the policy goal; (2) Present the costs and benefits of a policy that is meant to achieve that goal; and (3) Conclude that the policy is good or bad, depending on whether benefits exceed costs or vice versa.

In her important new article, Professor Lisa Philipps uses a Canadian tax policy debate to show that this approach is fundamentally misleading. Standard cost-benefit analysis—even if it is focused on inequality or other social outcomes— ignores the effect that adopting policies has on, as Philipps puts it, “the range of policy options considered thinkable.” (P. 102.) Tax policies can become embedded in the social system in a way that cannot be explained by standard cost-benefit analysis, and the resulting changes in social expectations can lead to self-defeating policy inertia.

Philipps’s article, which is part of a symposium in the Fordham Law Review entitled “We Are What We Tax,” adapts Judith Butler’s important work in feminist theory to analyze a seemingly technocratic question about tax incentives for saving. To some readers, this might seem a jarring combination, but the intersection of feminist theory and tax policy has become a growing and vibrant area of scholarly inquiry over the past few decades. This line of research is providing important theoretical and practical insights into tax policy debates that helpfully move the conversation past the usual neoliberal framework.

As noted, Philipps focuses on the social impact of tax incentives for saving in Canada. Philipps looks at changes in Canada’s tax policies over recent decades, showing how the government has increasingly relied on the tax system to encourage people to save for their retirements, through what are called “registered savings plans.” This approach is, however, only one possible response to the broader policy question, which is how a society can allow people to spend the latter years of their lives living a dignified retirement rather than either working themselves to death or being reduced to poverty when they can no longer work.

Another possible answer to that question is known in the United States as the Social Security system. Although that system is often understood as a system in which people pay taxes while working and then “get their money back” when they retire, Social Security is in fact financed on a pay-as-you-go basis, and there are no “accounts” into which payroll taxes are deposited. Although it is beyond the scope of this essay to discuss the issue in detail here, the fact is that pay-as-you-go systems and systems of personal deposit accounts are analytically identical in the aggregate. In one way or another, workers at any given time are reducing their consumption in order to allow former workers to stay alive, and in turn those current workers will be allowed to live without working at some point in the future. The means by which that system is financed cannot change that fundamental tradeoff.

Being analytically equivalent, however, does not mean that the two systems are socially or politically interchangeable. As Philipps points out, Canada made the choice to have its workers build nest eggs for their retirement years, and Parliament has experimented with various methods by which to use tax incentives to encourage people to save sufficient funds to live in some comfort during retirement. In that sense, much of the political discussion followed the standard pattern: (1) We need to get people to save more money, (2) The policies that we are adopting have succeeded in various ways and failed in various ways, and therefore (3) The policies need to be tweaked, enhanced, abandoned, and so on.

The Canadian policy of relying on private decisions to save was justified by the neoliberal gloss of “promoting individual self-reliance and familial responsibility to address human welfare needs” (P. 109). Even when supplemented by various tax incentives, however, the Canadian system has had a (completely predictable) negative distributional impact. Philipps’s insight, however, is not merely that private savings accounts have exacerbated inequality. She argues that the policy conversation is not merely a matter of saying, “Well, our current set of policies is not serving Canadians well in their retirement, so let’s put all possible ideas on the table to see what would work better.” Instead, the justifications for the private-saving approach to retirement became self-reinforcing, such that even the Canadians who are harmed by the system are now psychologically committed to its perpetuation.

How could that be? The idea behind the Canadian retirement system was not just a matter of telling middle class people that they had a personal responsibility to save for their retirement, but also of making retirement saving part of the very essence of middle class identity. Philipps writes: “To be an adult without a registered savings plan now threatens to place one on the margins of the social order” (P. 121). In other words, anyone who wishes to think of herself as a middle-class Canadian now automatically thinks that part of middle-class life will involve building retirement savings through registered plans.

This constructed social identity, however, has a surprisingly important impact on the policy debate. Because people aspire to be part of the middle class, and middle class identity includes being a rugged individual who saves for oneself and one’s kin, middle class Canadians (and those who hope to achieve that status) are now highly unlikely to approve of any plan to move away from a savings-based system to a macroeconomically equivalent pay-as-you-go system that looks like a Social Security plan. That is, people have learned that “being middle class” means sinking or swimming on one’s own, and because of that deeply embedded social expectation, any move to more explicitly acknowledge through policy that everyone is mutually dependent now somehow feels wrong.

This phenomenon is hardly limited to retirement savings. For example, basic financial principles make clear that the difference between owning and renting one’s residence is ultimately a matter of form and not substance, because the legal category of property ownership can be replicated through contractual agreements. Nonetheless, in the U.S. and Canada part of “the dream” is to be a homeowner. It does not seem to matter that the particulars of home ownership can be devastating for people when their houses lose value (as in the housing bust of 2008-10), or that good financial management should discourage putting all of one’s proverbial eggs in a single basket, because such cost-benefit considerations end up being overwhelmed by people’s psychological commitment to home ownership. A politician who suggests that home ownership is not a meaningful or appropriate goal will discover quickly that citizens strongly disagree.

And so it is now in Canada with respect to individually oriented retirement savings. As Philipps concludes: “Registered savings plans will endure not because they actually deliver the benefits they promise to most people but rather because they have been assimilated into Canadian middle-class identity” (P. 122). What would be viewed as a flawed and counterproductive policy that harms middle-class Canadians thus stumbles onward, because people have been taught to believe that there is a “right” middle-class way to save for retirement. The existing policy regime becomes its own justification.

Cite as: Neil H. Buchanan, Telling the Middle Class How to Be Middle-Class: Tax Incentives for Saving, JOTWELL (September 30, 2016) (reviewing Lisa Philipps, Registered Savings Plans and the Making of Middle Class Canada: Toward a Performative Theory of Tax Policy, 84 Fordham L. Rev. (forthcoming 2016), available at SSRN),

Thinking in More Nuanced Ways About Wealth and Income Inequality

In his book Capital in the Twenty-First Century, Thomas Piketty did us the great service of bringing the problems of wealth and income inequality to the fore. In the process, however, he also may have performed a bit of a disservice – making those problems seem simple, a mere function of the inequality r > g, where r is the rate of return to capital and g is the rate of economic growth. The solution, he suggested, was equally simple: a tax on wealth.

Bariş Kaymak and Markus Poschke, in The Evolution of Wealth Inequality over Half a Century: The Role of Taxes, Transfers and Technology, offer a more complex picture. They construct a general equilibrium model of the U.S. economy over the past half-century, incorporating (1) reduced income taxes on top earners (from a 45% effective rate for the top 1% in 1960 to a 33% effective rate in 2004, and from a 71% effective rate for the top 0.1% in 1960 to a 34% effective rate in 2004), (2) expansion of government transfers from 4.1% to 11.9% of GDP over the same period, and (3) higher pre-tax wage inequalities, which they attribute to technological change. (For these purposes, effective rate is defined as income taxes paid as a percentage of taxable income.) The question they ask and attempt to answer is: To what extent were the observed increases in wealth and income inequality over that period attributable to each of these changes or trends?

Income: Their answer with respect to income inequality is unequivocal: After taking into account standard general equilibrium adjustments, cuts in top rates had almost no effect on after-tax income distribution. Instead, the authors find that during the period studied, after-tax income inequality increased almost entirely because pre-tax income inequality increased.

Wealth: Their answer with respect to wealth inequality might strike some as counterintuitive. They find that an increasingly robust safety net (principally Social Security and Medicare) appears to have reduced incentives to save for the bottom 90%, resulting in increased wealth concentration at the top. Taken together, changes in U.S. tax and transfer systems explained nearly half of the observed rise in wealth concentration over the past half-century; the remainder was explained by increases in pre-tax income inequality.

Interactions: In addition, the two inequalities interacted in complex ways, intermediated by interest rates and prices:

Accumulation of additional wealth in response to tax cuts leads to a decline in the interest rate and an increase in the wage rate. The fall in the equilibrium interest rate discourages savings by lower wealth groups and exacerbates the direct effect of tax cuts on wealth inequality. As for income, the lower interest rate mitigates the rise in top incomes, while a higher wage rate benefits lower income groups as they live mainly off labor income.

(P. 5.)

By email to this reviewer, Prof. Kaymak explains the relationship between wealth inequality and wage rate increases as follows:

[T]he link from capital accumulation to the wage rate is an equilibrium effect …. As new wealth is channeled to production through investment, it generates a demand for additional labor since labor and capital are complements in production. Higher demand for labor then raises both employment (job creation effect) and wages. Of course, tax cuts could also change the labor supply behavior …. But we find this [latter effect] to be much weaker ….

Bottom line: greater inequality in wealth reduced income inequality by reducing the return to capital and increasing wages.

Finally, because general equilibrium adjustments take time, the authors predict that two or three more decades of increasing wealth concentration will result from policy and economic changes that have already occurred, at which point the top 1% will own about half of all U.S. wealth, up ten percentage points from their current share.

What should we make of all this?

First, general equilibrium analysis, although absolutely essential, is notoriously difficult and sensitive to assumptions. The authors note that their conclusions are inconsistent with those reached by some (Atkinson (2011) and Mertens (2013)), but consistent with those reached by others (Saez (2012)). Nonpartisans may want to take all such conclusions with at least a small grain of salt.

The authors might have distinguished between taxes on income from labor and taxes on income from capital, although these are difficult to tease apart. A priori, at least, we would expect different kinds of taxes to have different effects on savings and interest rates. Optimal tax theory, for example, conventionally assumes that taxes on income from capital depress savings, but that taxes on income from labor do not.

One wonders also whether some aspects of the U.S. tax system might have offset the results the authors describe through depressed demand for lower-wage labor. Accelerated and bonus depreciation may have encouraged the automation of less skilled jobs, for instance, and/or a largely territorial multi-national corporate tax system may have encouraged the offshoring of those same jobs as tariffs and other trade barriers were lifted.

With respect to the effect of offshoring, Prof. Kaymak observes, again by email:

For wages to rise through the equilibrium effect…, investment has to stay at home. We had run some simulations allowing for capital flight in early versions of our paper. What that does essentially is to mute the effect of top tax cuts on wealth inequality (interest rate does not fall in this case, so the bottom wealth groups do not curb savings as much). Income inequality in turn increases somewhat, because part of additional investment goes abroad, hence no wage gains for labor.

In other words, capital flight reduces wealth inequality but increases income inequality.

In any event, the paper makes an important contribution; its thoughtful analysis should persuade the reader that problems of wealth and income inequality are more complex than Piketty claims. Increases in the safety net that reduce disparities in consumption may exacerbate disparities in wealth. Ed Kleinbard, in his book We Are Better Than This, has urged that we worry less about progressivity in taxation and more about progressivity in spending. Doing so, the current paper suggests, may actually result in further concentrations of wealth in the already wealthy.

This, in turn, raises fundamental normative questions: Do we really care about disparities in wealth? Why? Do we care more about disparities in income? Or is our ostensible concern about inequality really a concern about poverty? If Kaymak and Poschke are even partly right, it may not be enough to say: “Equality good. Inequality bad.” We may actually have to do some hard normative work.

Cite as: Theodore P. Seto, Thinking in More Nuanced Ways About Wealth and Income Inequality, JOTWELL (August 12, 2016) (reviewing Bariş Kaymak & Markus Poschke, The Evolution of Wealth Inequality over Half a Century: The Role of Taxes, Transfers and Technology, 77 J. Monetary Econ. 1 (2016)),

Kuznets Waves of Rising and Falling Inequality?

The age of inequality has prompted an age of writing about inequality. Now writing about inequality has started to come of age. An important example is Branko Milanovic’s new book, Global Inequality: A New Approach for the Age of Globalization.

Milanovic, an economist and Senior Scholar at CUNY’s Luxembourg Income Study Center who has been studying global data regarding economic inequality for more than twenty years, discusses three main topics in this book: inequality within a given country, that between or among countries, and what might be the path of global inequality in the future. While the book’s contributions on all three topics contain numerous points of interest, the first has especial theoretical relevance. Milanovic suggests that inequality may decrease in the coming decades in some rich countries, but probably not in the United States.

In the 1950s, economist Simon Kuznets famously posited that, as an economy develops, market forces lead first to increasing and then to declining economic inequality. However, while this was the story seemingly told by the data available to him at the time, it has subsequently been contradicted by evidence of generally rising inequality in developed countries since the 1970s. Thomas Piketty, in his noted 2013 book, Capital in the Twenty-First Century, argued that rising inequality is the norm, and that the mid-twentieth century’s “Great Easing” from which Kuznets generalized was merely a blip, created mainly by the early-to-mid-century disasters of war, revolution, the Great Depression, and then more war. Piketty attributed the dominant trend that he discerned to “r > g” – a general tendency for returns to capital to exceed overall economic growth rates, causing wealth-holders’ share of the pie to keep on growing. This view did not, however, permit him to explain why, in U.S. data, rising wage inequality, rather than returns to capital, has played the largest role.

While Kuznets’ problem, in retrospect, was his projecting from just two main types of data points – Western countries during the Industrial Revolution and then during the mid-twentieth century – Piketty, for the most part, adds just one more: the same societies over the last several decades. Milanovic, by contrast, draws on data and studies from many more countries and over a far longer period. (He even has inequality estimates for the Roman Empire and its successor states, over the period from 14 to 700 A.D.) All this information permits him to develop a broader understanding of the multiple forces that historically have pushed towards either rising or falling inequality.

Against this background, Milanovic posits what he calls Kuznets cycles or waves – successive periods of rising, and then falling, inequality in a given country. He argues that these may tend (all else equal) to track periods in which the annual growth rate of the economy first rises and then falls, as new technological revolutions emerge and are then assimilated. However, he recognizes that one cannot overgeneralize, given that “[t]he future often likes to throw curve balls” (P. 117). In particular, various factors that are at least partly exogenous to technical change as such – pertaining, for example, to trends in a country’s politics, infrastructure, and educational system – may also affect inequality trends.

This could suggest a somewhat different view of Kuznets waves as being, in effect, an ex post observation that merely reflects how things happened to play out. By analogy, if you keep on tossing coins, you will periodically get several heads in a row at some points in the sequence, and tails at other points, leading to an observation of successive heads-dominated and tails-dominated cycles or waves.

Looking forward, Milanovic sees several ways in which “benign forces [i.e., not just disasters like those of the mid-twentieth century] could hypothetically push rich countries onto the downward portion of the second Kutznets wave” (P. 113). These include rising education, dissipation of the economic rents that have recently created so many high-tech mega-fortunes, income convergence between countries (especially if Asia’s recent rise extends to other continents), and a shift from high-skill-biased to low-skill-biased technological change (although it is not clear why this should be expected to happen).

For the United States, however, Milanovic sees the possibility for a “perfect storm” of rising inequality (P. 180), partly for internal political reasons. “Concentration of income will reinforce the political power of the rich and make pro-poor policy changes in taxation, funding for public education, and infrastructure spending even less likely than before.” (P. 181.) If he is right about this, as well as in his more optimistic forecast for other rich countries, then American exceptionalism may continually increase over the next few decades, but not in a good way.

Cite as: Daniel Shaviro, Kuznets Waves of Rising and Falling Inequality?, JOTWELL (July 18, 2016) (reviewing Branko Milanovic, Global Inequality: A New Approach for the Age of Globalization (2016)),

U.S. Tax Policy and Puerto Rico’s Fiscal History

Diane Lourdes Dick, U.S. Tax Imperialism in Puerto Rico, 65 Am. U. L. Rev. (forthcoming 2016), available at SSRN.

Puerto Rico faces a host of public finance woes. It owes over $70 billion in public sector debt. On May 2, 2016, it missed a major debt payment to its Government Development Bank bondholders. Congress is currently considering legislation that will allow Puerto Rico to restructure its debts. Without debt restructuring, further defaults seem inevitable. Puerto Rico has attempted to use its tax laws to ease its public finance problems. However, in March, the United States District Court for the District of Puerto Rico ruled in Wal-Mart Puerto Rico v. Zaragoza-Gomez that an increased tax imposed by Puerto Rico on certain cross-border, related-party property transactions violated the U.S. Constitution and the Federal Relations Act. The court acknowledged that the tax was implemented to quickly raise revenue to ameliorate Puerto Rico’s fiscal challenges, but it struck down the tax nonetheless. As of this writing, Puerto Rico’s fiscal future remains uncertain.

Puerto Rico’s economic and fiscal condition and its tax policy are, of course, related, and the United States has played an important role in both. But what exactly is the United States’ economic relationship with Puerto Rico? What do U.S. tax and fiscal policies with respect to Puerto Rico tell us about that relationship? And how have these policies influenced the economic trajectory of the island? Tax aficionados may be broadly familiar with tax incentives for investment in Puerto Rico, but what deeper story lies beneath?

Diane Lourdes Dick takes up these questions in her article entitled U.S. Tax Imperialism in Puerto Rico. The article develops a theory of U.S. tax imperialism, which I understand to be a subset of economic imperialism, by detailing the ways in which U.S. tax policy has been used to control the economic trajectory of the territory for the benefit of the mainland.

Professor Dick describes three historical stages of such tax imperialism:

In the first stage, beginning after the Spanish-American War of 1898 and continuing through 1919, the United States revamped Puerto Rico’s tax laws, which had developed under Spanish rule. In essence, U.S. interventions during this period decreased reliance on indirect taxes (for example, by replacing older consumption-type excise taxes with more narrowly defined excises) and increased Puerto Rico’s reliance on direct taxes on personal and corporate income. An existing tax on income from property was also replaced with one based on property valuations. Professor Dick discusses the impact of this property tax in pressuring Puerto Rican landowners to either sell or productively utilize their property; the effects of the tax on land ownership; and the tax’s role in the formation of a single-crop sugar economy, which benefitted large U.S. sugar corporations.

In the second stage, spanning 1920 through 1974, Professor Dick characterizes the United States as pursuing tax and economic policies designed to utilize Puerto Rico as a low-cost provider of manufacturing inputs for U.S. corporations, thereby reducing dependence on foreign sources for these inputs. For example, a federal tax exemption for the foreign-source income of certain U.S. corporations that derived income from U.S. possessions was enacted. This exemption was converted into the Section 936 possessions tax credit by the Tax Reform Act of 1976. When paired with changes in Puerto Rico’s tax laws exempting U.S. corporations from Puerto Rico’s income, property, and other taxes, this exemption effectively provided U.S. companies with a blanket tax holiday in Puerto Rico.

In the third stage, from 1975 to the present, by contrast, concerns about capital flight from the United States mainland to Puerto Rico and other locations led to a shift in U.S. tax policies, with a new emphasis on incentivizing capital to flow out of Puerto Rico and back to the U.S. mainland. Professor Dick notes that the U.S. now allowed U.S. parent corporations to claim a full dividend-received deduction for income earned in U.S possessions. However, Puerto Rico’s counter-move—extension of Puerto Rico’s withholding tax to repatriated dividends—worked to offset the incentive to repatriate earnings to the U.S. mainland. U.S. legislators eventually responded by repealing the Section 936 possessions tax credit in 1996 (subject to a ten-year phaseout), with complete elimination for tax years beginning after December 31, 2005. But the repeal led many corporations operating in Puerto Rico to convert their subsidiaries to controlled foreign corporations, effectively keeping capital offshore and preventing the U.S. Treasury from taxing it, thus thwarting the U.S. goal of encouraging repatriation of earnings back to the United States.

In setting out a three-stage theory of tax imperialism and by situating U.S. tax and fiscal policy against the broader backdrop of U.S. economic policy in Puerto Rico, U.S. Tax Imperialism in Puerto Rico challenges the dominant narrative surrounding U.S.-Puerto Rico economic relations and Puerto Rico’s current fiscal condition. This narrative tends to portray the U.S. as a benevolent patron and to blame Puerto Rico for its continuing fiscal difficulties. Professor Dick’s article illuminates the tax and economic imperialism underlying the evolution of U.S. tax policy with respect to Puerto Rico, presenting a wide-ranging analytical history of the economic relationship between the U.S. and its territory and discussing how U.S. tax policies have contributed to Puerto Rico’s current fiscal problems. As I read it, the main takeaway is not so much that any one policy is necessarily bad in and of itself, but that as a matter of motivation, the U.S. has been using Puerto Rico for its economic advantage for over a hundred years and has designed Puerto Rico’s tax policies to U.S. ends.

U.S. Tax Imperialism in Puerto Rico is a careful, interesting, and timely account of how the U.S. has designed tax policies with respect to Puerto Rico since 1898, but its contribution does not end there. The article also raises broader questions. For example, one wonders whether similar dynamics have been in play with respect to the other U.S. territories. Another important question concerns Puerto Rico’s relatively unnoticed place in the history of capital flight from the United States. According to Professor Dick’s account, capital flew from the U.S. to Puerto Rico as a result of tax incentives. But then it fled further and more permanently abroad due to the increasing use of controlled foreign corporations by U.S. corporations. The growth in controlled foreign corporations occurred in response to the repeal of the possessions tax credit and the broader shift in U.S. tax policy in Puerto Rico after 1975. This account potentially muddies the usual story about capital lockout and capital flight: it suggests that contrary to the usual narrative, offshoring of U.S. capital cannot be entirely attributed to direct comparisons between the U.S. and other sovereign competitors. Rather, at least some capital may have moved from the U.S. to U.S. possessions such as Puerto Rico, and then to more distant shores as a result of U.S. tax policy with respect to the possessions. This is a topic that merits further investigation.

Cite as: Shu-Yi Oei, U.S. Tax Policy and Puerto Rico’s Fiscal History, JOTWELL (July 5, 2016) (reviewing Diane Lourdes Dick, U.S. Tax Imperialism in Puerto Rico, 65 Am. U. L. Rev. (forthcoming 2016), available at SSRN),

Don’t Delegate This Reading

James R. Hines Jr. & Kyle D. Logue, Delegating Tax, 114 Mich. L. Review 235 (2015).

In modern regulatory states, the theoretically firm lines dividing the legislative, executive, and judicial branches of government are increasingly blurred. Teasing out how to design and enforce effective regulation has become a major preoccupation of scholars and policymakers in every area of law.

Delegating Tax, an article by the talented James R. Hines Jr. and Kyle D. Logue, is wonderful reading in that light. The article contrasts the reluctance of Congress to delegate the lawmaking authority of the IRS and Treasury in the tax area with Congress’ increasing willingness to delegate that authority to other federal administrative agencies. The authors make the case for great delegation in the tax area, noting the potential for the executive branch to draw on greater expertise and to respond more quickly.

Hines and Logue create a taxonomy of delegations that they urge Congress to consider: delegation of parameters for tax subsidies to the Treasury Department, delegation to set some income tax rates to an independent agency like the Federal Reserve, and delegation of tax reform to an independent commission. Hines and Logue would reserve the ability for Congress to fix the distribution of tax liabilities to ensure “fair distribution.”

I enjoyed reading the whole article, although my favourite part was the authors’ efforts to answer the question, “Why should the regulatory approach to tax policy differ from regulatory approaches to other areas of federal policy?” (P. 259). They examine historical accident and path dependence and the value of retaining the ability to set rates with Congress as a key tool in facilitating bargaining in the legislative process. They find each possible justification to be wanting.

The piece concludes with an exploration of the constitutional constraints on expanded tax delegation. Ultimately, the authors conclude that their proposed delegations should “pass constitutional muster” (P. 271).

The article takes on the broad areas where more delegation might appropriately be considered as a mechanism for accessing some of the benefits of the executive branch. The authors acknowledge at the outset of their piece that Congress could replace the Internal Revenue Code with a single sentence, “The Department of Treasury shall promulgate all tax rules necessary to raise revenue sufficient to balance the federal budget and shall do so in a manner that is fair and efficient” (P. 238), although they do not recommend that approach. The Hines and Logue article provides the platform from which readers can ask additional questions about delegation among the branches of government in the drafting of every provision in the Internal Revenue Code (or any piece of legislation, for that matter).

The question of the appropriate balance among the legislative, executive, and judicial branches in tax lawmaking is not unique, of course, to the United States, although the balance struck in the United States has unique features. Hines and Logue’s article contributes to the conversation highlighted in comparative work on this same topic advanced by Chris Evans, Judith Freedman, and Richard Krever in The Delicate Balance: Tax, Discretion, and the Rule of Law (IBFD, 2011). It’s a pleasure to see that the dialogue continues.

Cite as: Kim Brooks, Don’t Delegate This Reading, JOTWELL (June 15, 2016) (reviewing James R. Hines Jr. & Kyle D. Logue, Delegating Tax, 114 Mich. L. Review 235 (2015)),

Putting a Face to International Tax Avoidance

Omri Marian, The State Administration of  International Tax Avoidance, 7 Harv. Bus. L. Rev. (forthcoming, 2016).

The world of international tax avoidance is a colorful one. There are the legal structures, with names like the “Double Irish Dutch Sandwich,” the exotic locales, like Bermuda and the Cayman Islands, and the identity crises presented by “hybrid” entities and financial instruments. But rarely does international tax avoidance have a human face and one could be forgiven for getting the impression that falling effective corporate tax rates are as inevitable as water flowing downhill. Corporations, acting in the interests of their shareholders, maximize their after-tax profits. States, acting in the best interests of their residents, set tax policies that are incongruous with the policies of other states. The “bad actors,” if there are any in this story, are corporate aggregates of one sort or another, multinational corporations and tax haven countries.

But the LuxLeaks scandal has given us one human face that stands out from the crowd of aggregates. This is the face of Marius Kohl or “Monsieur Ruling,” the former head of the Luxembourg agency, who gave rulings to taxpayers on the tax treatments of their proposed transactions. In The State Administration of International Tax Avoidance, Omri Marian does a wonderful job of explaining how this one bureaucrat acted to facilitate massive tax avoidance by engaging in “arbitrage manufacturing.” Marian argues that rogue individuals pose an ongoing threat to international tax cooperation. His paper clearly explains how arbitrage can be manufactured, documents how it was done in Luxembourg, and draws from the LuxLeaks episode an important lesson about the need to integrate micro reforms of tax administration into the macro project of international tax harmonization efforts.

This emphasis on individual actors, including not only Kohl but also the relatively small number of accountants and tax advisors working in on behalf of US and UK clients in Luxembourg, is one of the significant contributions of the paper. States and their regulatory agencies do not make decisions, individuals do. Those individual decisions are the results of their own private calculi, and shifting attention to individual incentives and constraints is an important analytical step. We cannot assume that tax administrators’ preferences necessarily align with best interests of their own country. Shifting attention to the incentives and constraints of the decision-makers themselves will force us to confront the monitoring, supervision, and optimal incentive structure problems for tax administrators that we do in other settings. The problem with Kohl was, in some sense, another example of regulatory capture, but one that has received little attention in the international tax compliance context where, as Marian notes, the focus has been on the harmonization of substantive tax laws.

Marian grounds his argument in an original data set. By thoroughly reviewing 172 tax rulings, Marian is able to provide a broad account of Kohl’s ruling practices as tax administrator. He reports descriptive statistics about the kinds of taxpayers who sought rulings, the time that was spent reviewing the applications, the legal issues on which rulings were sought, and the names of the tax advisors who submitted the rulings. Marian is generally persuasive in arguing that it is implausible that Kohl could have given the applications more than a cursory review, given the time that he spent with them; however, he cannot completely rule out the possibility that the ruling applications merely reflected agreements negotiated in advance between Kohl and the taxpayers. But this is a minor point in light of all of the other evidence Marian presents to suggest that Kohl was fully pliant. Although Marian does not compare the merits of the positions taken in the ruling applications with the particulars of Luxembourg law, the indirect case he makes for Kohl rubber-stamping the applications is compelling. Most damning is that Kohl afforded the same financial instrument different treatment in order to comply with different taxpayer requests.

Marian has done a service by compiling a dataset from these rulings, but in addition to the effort involved in hand-coding this new dataset, there is much to admire about the restraint and care that he demonstrates interpreting it. He is forthright about the limitations about what can be generalized about tax administration from this one episode, and fastidious about noting potential issues. When evaluating any empirical study, the reader must be able to assume that the author has done the analysis with integrity and has carefully considered and set forth the key assumptions of the approach. This paper gives every indication that Marian is a trustworthy guide.

The OECD’s project on base erosion and profit shifting includes a proposal that would address the particular debt/equity arbitrage that was most common among the transactions approved by Messr. Ruling. This proposal would require matching, so that a payment that was not includible in income in the payee country could not be deductible in the payor country. This is a good rule. But Professor Marian’s point, ably illustrated by the case of Marius Kohl, is that it is insufficient to harmonize substantive tax laws. Certainly this needs to be done, and harmonization must cover as many countries as possible. But in the final analysis it will be individuals who make enforcement decisions and rule on ambiguous cases.

In this realm, like so many others, we need to think about how to police the police. Doing this effectively requires understanding what motivates bureaucrats and regulators but, unfortunately, investigations into the LuxLeaks scandal have provided few answers to this question. Neither Marian nor the journalists who have covered the story have been able to explain why Kohl acted as he did. Was he compensated? Did he relish the power to give people what they wanted? Was he merely indifferent to the performance of his duties? Marian provides a valuable contribution in drawing attention to the powers of individual actors. Further work should focus on what motivates those actors, so policymakers can design the proper incentives and monitoring regimes to regulate them.

Cite as: Andrew Hayashi, Putting a Face to International Tax Avoidance, JOTWELL (May 20, 2016) (reviewing Omri Marian, The State Administration of  International Tax Avoidance, 7 Harv. Bus. L. Rev. (forthcoming, 2016)),