Apr 18, 2023 Jon Choi
Brian D. Galle & Stephen E. Shay,
Admin Law and the Crisis of Tax Administration, __
N.C. L. Rev. __ (forthcoming 2023), draft available at
SSRN (Jan. 27, 2023).
Tax regulations and subregulatory guidance abound with apparent giveaways to taxpayers, favorable interpretations with little or no statutory justification. Examples include the check-the-box rules, the waiver of 382(l)(5) net operate loss carryforward limitations during the financial crisis, and many more. On the other hand, it’s hard to think of cases where Treasury or the IRS has deviated from the statute at taxpayers’ expense. The typical explanation for this asymmetry is standing doctrine: if my tax bill is too high because of an agency rule, I can sue the government, but if it’s too low, nobody can sue to raise it. Now, a terrific new article by Brian Galle and Stephen Shay considers the implications of this “tilt against revenue” for administrative law.
Galle and Shay bring a fresh perspective to the classic debate on administrative tax exceptionalism. They suggest that the tilt against revenue cuts against the formalist, anti-exceptionalist position (most famously promoted by Kristin Hickman) that tax regulations should follow the same procedural rules that apply to all other regulations. Instead, they suggest that courts should counter-act the tilt against revenue by applying administrative law requirements more leniently to Treasury and the IRS.
To illustrate their arguments, Galle and Shay consider as case studies two regulatory interpretations of the GILTI rules, one pro-taxpayer and one anti-taxpayer. The pro-taxpayer regulation was lauded by comments submitted by interested parties and will likely never be challenged due to lack of standing; the anti-taxpayer regulation was heavily criticized (again by interested parties) and will likely be challenged in court. The article also helpfully summarizes existing literature on the standing asymmetry in tax law, written by scholars like Larry Zelenak and Daniel Hemel.
And although Galle and Shay begin with the problem of standing, they don’t end there. They catalog how a variety of current administrative conditions create a bias against the collection of revenue. For example, the current IRS resource deficit makes it difficult for existing tax regulations to be adequately enforced as written, making IRS action more difficult and further favoring taxpayers.
So what’s the solution? Galle and Shay essentially propose a thumb on the scale against taxpayers in tax administration, essentially a tilt toward revenue to counteract the existing tilt against revenue. They lay out some concrete suggestions relating to ongoing debates in administrative tax law: for example, they suggest that courts should be more lenient in declaring tax regulations “interpretive” and therefore exempt from notice and comment, and more generous in applying the exceptions to notice and comment for “good cause” or “harmless error.”
One of the article’s best features is that it deftly navigates the difficult line between normative and positive arguments. Many tax scholars may find Galle and Shay’s arguments persuasive as a normative matter but have lingering doubts as a matter of positive law. Consider the basic case against exceptionalist tax administration: the Administrative Procedure Act purports to apply to all agencies equally, and nothing in the statute justifies special treatment for the IRS. But as Galle and Shay argue, courts must make normative policy judgments all the time in tough cases, and their normative judgments are the basis of much of the common law surrounding the APA. Thus normative judgments are unavoidable, and perhaps even desirable, even when one takes a positivist view of statutory administrative law.
Whether you agree or disagree, Galle and Shay’s new article makes a valuable contribution to the literature on tax administration and is well worth a read.
Mar 8, 2023 Charlene D. Luke
In Taxing Data, Omri Marian argues that taxing data-rich markets requires rejecting income taxation—not only as implemented but also “in its optimal theoretical form”—as the best proxy for ability to pay. Instead, Marian makes the radical suggestion that data itself “may be a better proxy” for ability to pay, and he offers three fundamental features that should guide “a reimagined tax on data.”
The article is rich in detail and is at its most persuasive in discussing the income taxation of business entities. Drawing on the work of tax historians and scholars, Marian summarizes two dominant narratives explaining the origins of the corporate income tax: the corporate income tax as a proxy for shareholder income, and the corporate income tax as a means to rein in management. Marian points out that if corporate ownership and management is largely local and traceable, which it was “at the dawn of corporate taxation,” then “whether the attempt was to target shareholders’ ability to pay, or managerial interest, the taxation of corporate income made sense.”
On the horizon, however, was a perfect storm of globalization, dispersion, and “intangible-ization,” which, Marian asserts, “our data-rich economy amplifies by orders of magnitude.” These forces have now so completely swamped the corporate income tax’s ability to identify source or ownership and to measure value that it is time to “revisit our conceptual tax design.”
Dispersion, for example, is not only a matter of diffuse, multi-layered ownership, but it also “defines all other functions of the modern multinational corporate entity.” If corporate income taxation no longer operates “as a functional instrument to tax corporate owners or managers,” then there is “no substantively meaningful corporate ‘home’” to support residence-based taxation. Marian asserts further that, because “‘value creation’ is fragmented, outsourced, and facilitated through a multitude of intercompany transactions between affiliated companies,” “‘source taxation’ in the context of corporate entities seems equally meaningless.”
In turning to “intangible-ization,” Marian emphasizes that the “transformation of capitalism” wrought by intangible investment overtaking tangible investment has caused “insurmountable tax administration challenges.” Among these is the obvious difficulty of measuring intangible investment, and “[i]f we cannot measure investment, how can we measure the return on investment.”
As Marian notes, the challenges to the income tax arising from globalization, dispersion, and intangible-ization are well known and have yielded multiple reform efforts, including the OECD’s recent two-pillar approach. While Marian applauds these reform efforts, he concludes that they will be insufficient because they continue to rely on the concepts of source, residence, ownership, and monetary value.
Marian contends that, to reach the data economy, what is needed is a bold move away from reliance on income as a tax base. This would include moving away from reliance on proposals tied to consumption or savings since they are simply “economic components of income.” He argues that a data tax would provide an administrable, equitable and efficient solution, and he proposes three fundamental features for such a data tax. The combined effect of the three fundamental features is somewhat reminiscent of a wealth tax, but one that is tied to data volume, flow, and use rather than to monetary value and ownership.
First, the tax base should be raw data, so that the “tax depends on the volume of data, not on the monetary value of data.” Marian explains that “each little piece of data” generally has no measurable value because “[o]nly when terabytes of data come together do they become valuable, and only because they are aggregated.”
Second, tax should be “collected on the flow of data.” This approach alleviates the need to source the data to a particular location. Marian explains that the source of value of data is “probably not where people whose data [is] collected reside because . . . each individual piece of data has no value.” Trying to locate source where “the data is analyzed. . . also seems theoretically farfetched” given the dispersion of those locations and that much of the “manipulation of data is outsourced to robots.” He posits that such a tax would be readily administrable given that it is clearly possible to tie fees to data volume given the use of such measures by internet service provider and cell phone data plans.
Third, “the users of the data” should be the taxpayers. This approach allows for a tax not dependent on ownership, which is needed because owning data “is in no way an economically meaningful concept.” As an example, Marian discusses data “owned” by both an individual and by Google: “If both you and Google own your data, have you and Google experienced an equal increase in your ability to pay?” The answer is, unsurprisingly, that the “data is more beneficial to Google, because of the other data it has.”
Marian acknowledges that these features could lead to equity concerns, but he argues that, as is also the case with other types of taxes, “generous exemption[s]” could be provided in working out system details, and the tax burden could be made progressive based on data usage. He notes, “[d]ata-rich taxpayers are also the richest taxpayers in traditional terms.” Further, because a data tax would reach taxpayers who are adept at avoiding an income tax, adding such a tax will increase progressivity.
Marian reasons that a data tax would be efficient, in the sense that it is unlikely to change taxpayer behavior. He likens a data tax to mineral taxation: “Activity must happen where the minerals are. As long as the tax is not prohibitively expensive and there is profit to be made, activity will take place where the valuable resources are found.” It is possible, he concedes, that some data users will pass the burden onto others “by charging for . . . services that are now free.” He points out that this is not a bad thing—first because it may decrease use of platforms that are arguably causing social harms, and second, because this would generate income that could be taxed under the current income tax system.
In the final section of his article, Marian reviews existing proposals for direct taxes on data or for data proxies. For example, he discusses a proposal from the mid-1990s by Arthur Cordell for a “bit tax,” as well as suggestions for taxing the infrastructure for the transmission and collection of data. Although Marian does not dismiss any proposal out of hand, given the three fundamental features outlined above, he clearly favors a tax that functions as an excise on data volume.
While the article’s scope did not permit addressing the full range of detailed issues that would have to be worked out in implementing a data tax, Marian more than fulfills his stated goal of “start[ing] a discussion about a data tax as a remedy for the failure of income taxes in data-rich markets.”
Feb 6, 2023 Leigh Osofsky
In this illuminating article, Heather Field describes her adoption of a flipped classroom model for teaching tax law during the pandemic. Like many, Field learned lessons from her pandemic teaching that will continue to be instructive now that we are (hopefully) back to an in-person teaching world. Field’s thoughtful article is well worth a read for those (like me!) wanting to do more with flipped classroom teaching.
As Field describes, a flipped classroom involves moving content delivery outside of the classroom (for instance to pre-class videos created by the instructor), thereby creating more space in the class period for active learning in the form of activities and problems. The purported benefits of flipped classrooms include more time for active student learning in class, the ability of students to learn and review content from the videos at their own pace, and the possibility of more differentiation in in-class problem sets. Flipped classrooms certainly were not new to the pandemic, but rather had existed in a variety of educational spaces prior to the turn to remote learning. However, like Field, many professors had not embraced the flipped classroom before the emergency teaching experience that was Spring 2020.
Field’s flipping of classes involved providing students before-class mini-lecturettes, which gave students an overview and explanation of the material. Class time was then spent going through problems, potentially with polls and additional bonus problems added in to the class to better gauge student understanding. Overall, her experience was a positive one. Students appreciated the opportunity to review the content at their own pace and potentially revisit it, students had more time in class to work on problems, Field was better able to direct students to the important parts of the course, weaker students were able to participate more fully in the class, Field could cover more difficult material much more efficiently, and Field had the opportunity to think more carefully though all her explanations of the course material.
One of Field’s most interesting insights is how a flipped classroom allowed her to exchange certain types of classroom rigor for other types. One of her principal concerns with flipping a classroom was that it would reduce rigor. By providing students with explanations of the law, she worried, she would relieve students of the difficult task of having to interpret the law themselves. This was particularly concerning to Field in teaching tax law, because a big part of the job of tax lawyers is to read the primary source tax materials themselves and explain the materials to someone else. To some extent, Field found that her concerns about rigor were not entirely unfounded – when she explained a statute in a pre-class video, students did not have to try to make sense of it themselves first. However, Field unexpectedly found that the use of the videos also created opportunities for new kinds of rigor. With a quicker understanding of the basics of the law, students had time to examine harder problems. They also had time to work on other skills, such as using the law to engage in planning or strategizing.
I found this insight particularly valuable for a couple of reasons. First, it emphasized that, as professors, we should be trying to teach our students a variety of lawyerly skills. How to read and interpret the law as a primary source is a critical skill students should learn, but so are more advanced skills such as how to apply the law in strategic ways. I also appreciated Field’s insight because it illustrated how pre-class videos need not be an all or nothing approach. As a professor, I tend to favor using the same type of format each class. This can be useful (in terms of developing teaching routines), but I think Field is right that professors should first think through what their pedagogical goals are on a given day, and then think about how and whether pre-class videos will help facilitate those goals on that day.
In addition to some of these major lessons, Field also offers a host of smaller tips. As Field describes, flipping a class is a lot of work, and professors should take care to create materials in a way that makes them re-usable in later years. One tip I found particularly useful was that professors should use the same slide deck for the pre-class videos and the in-class portion of the course. However, the in-class portion should also include blank slides, which enable the students to work through additional problems in class. Using the same slides for both purposes can reduce confusion for the students and unnecessary work for the professor. Field also widely counsels that professors also should not hesitate to flip one unit at a time, to see how it works and what, if any, adjustments to make.
In short, Field’s article is a useful and inspirational synopsis of how she made the switch to flipped classrooms during the pandemic. I really appreciate Field sharing her process and journey. I believe that many professors will find the article useful as they continue to grow in their teaching practices.
Jan 10, 2023 Susan Morse
Under tort and agency common law, the more control a firm exerts over its workers, the more likely that workers will be classified as employees rather than independent contractors. The need to determine control prompts a line-drawing exercise and offers opportunities for firms and/or workers to manipulate the result, rather than choosing the best abstract analysis on the facts. In Independent Contractors in Law and in Fact: Evidence from U.S. Tax Returns, Eleanor Wilking constructs a huge tax-return-based dataset and uses it to show that firms appear to game the employee/independent contractor distinction, that evidence of manipulation is stronger when lower-income workers are involved, and that the tendency to classify workers as independent contractors has likely increased over time.
A lot turns on whether a worker is an “employee.” Access to retirement plans, health insurance, certain government benefits and antidiscrimination protections follow from employee status. Tax, tort, contract, intellectual property and other legal results often differ based on whether a worker is an employee. Most, although not all, legal features require firms to offer more protections and benefits for employees, as opposed to independent contractors. Thus a firm’s incentive to manipulate generally tilts towards independent contractor classification, holding all else equal, particularly for lower-income workers.
Wilking created two datasets for this project. Both take advantage of the fact that different tax reporting forms for compensation are required according to worker status. An independent contractor receives a 1099-MISC or 1099-K, while an employee receives a W-2.
The first dataset is the “descriptive analysis sample,” shown in Table 1. This is an enormous data set with about 70 million observations, each a compensation information return linked to an individual tax return, drawn from a 2% random sample of all electronic W-2, 1099-MISC, and 1099-K filings available for the tax years 2001-2016. The second dataset is the “causal analysis sample,” shown in Table 4. This panel data set covers about 120,000 employees and includes ten years of data for each employee, starting when the employee is age sixty.
In her descriptive analysis, Wilking shows that independent contractor relationships, as reported on Forms 1099-MISC or 1099-K, have grown dramatically, from about 38 million to 57 million reports from 2001 to 2015. She proposes, based in part on a twenty-factor test developed by the IRS, that six quantitative metrics should correlate with independent contractor status. These are: smaller share of income, larger number of payers, longer distance between home and work, shorter job tenure, higher compensation volatility, and more business deductions taken by the worker. Wilking hypothesizes that independent contractor classification should correlate with each of these metrics, if the firms and/or their workers use an evenhanded application of the common-law test.
But Wilking finds that these metrics often do not differ significantly for independent contractors as opposed to employees, especially for workers whose income is below the sample’s median. For these low-income workers, share of income, number of payers, tenure, and compensation volatility generally converge whether a worker is classified as an independent contractor or as an employee (Figures 9-14). This suggests manipulation to achieve a better tax (or other) result, without any meaningful shift in the underlying facts of the work relationship.
The manipulation hypothesis draws some support from Wilking’s causal analysis. She exploits features of the Medicare rules that distinguish payment obligations for workers of age 65 or older based on whether the work is for a large firm, with twenty or more full-time employees; or a small firm, with fewer than twenty full-time employees. A large firm’s health insurance plan is the primary payer of worker medical expenses, and Medicare is secondary – but only for employees, since a 1099-MISC recipient typically is not covered by employer insurance. In contrast, for a small firm, Medicare is the primary payer of worker medical expenses, even for employees. Wilking finds that, when workers in her sample turn 65, an employee at a large firm (proxied as a firm that issues at least 50 W-2s) is 0.08 percentage points more likely to transition from receiving a Form W-2 to receiving a Form 1099-MISC from the firm.
Wilking offers an imaginative use of a huge treasure trove of tax return data. Her results are powered not only by the enormous datasets she creates, but also by her creativity in fashioning quantitative proxies for the question of control posed by the common law of tort and agency. As compared to, say, the outcomes of reported cases, patterns of firm and worker planning are difficult to discover and describe. They are buried in countless private contracting and planning decisions that rarely receive any public attention. Wilking has figured out how to use tax return data to excavate patterns of private ordering that are usually hidden from view. What a contribution — both because of Wilking’s specific findings and because of her clever, large-dataset matching methodology.
To this original empirical contribution Wilking adds some tentative normative remarks. She invokes Professor David Weisbach’s classic criticism of line-drawing and reviews the incentive to manipulate or intentionally misclassify when discrete and different legal results lie next to each other on a continuum. She suggests that some such line-drawing exercises might eventually become obsolete. If they did, the question would arise of what should replace existing binary paradigms, like those that give firms and workers different benefits and responsibilities under many areas of law depending on how much control the firm has.
Cite as: Susan Morse,
Terms of Employment, JOTWELL
(January 10, 2023) (reviewing Eleanor Wilking,
Independent Contractors in Law and in Fact: Evidence from U.S. Tax Returns, 117
Nw. U. L. Rev. 731 (2022)),
https://tax.jotwell.com/terms-of-employment/.
Nov 24, 2022 Charlotte Crane
In the most recent update of the Congressional Research Service pamphlet, Corporate Tax Reform: Issues for Congress, RL34229 (2021), Jane Gravelle presents a survey of the recent economic literature that has been invoked to support various changes in the corporate income tax. Gravelle is an economist who has spent her career bridging the gap between academic approaches to tax and the nitty gritty of tax policymaking within the beltway. In this document she explains how little anyone knows about the corporate income tax in the US.
As Gravelle points out, the corporate income tax has shrunk in importance in the last 70 years, declining from 30% of federal tax revenues and 5.6% of GDP to less than 10% of federal tax revenues and less than 3% of GDP. Of course, at the beginning of that time period, the corporate income tax could be used for the purposes of most economic analysis as essentially the equivalent of all business income taxes. As Gravelle points out, the rise of other business forms that afford the benefits of incorporation without attracting the corporate tax is responsible for a large portion of this shift. Sheltering through offshore entities has contributed much of the rest.
The report is in many respects a brief against arguments to the effect that raising corporate rates will actually lower the revenue collected or will impose unintended burdens on labor. Gravelle reviews the recent economic studies regarding various impacts of an increase in the corporate tax. These include those studies exploring the behavioral responses (under what conditions is a Laffer-revenue-reducing response possible), the incidence (does labor bear the corporate tax, and if so, what part of labor) and the distributive effects (who owns the capital most affected).
The summary provided of this literature is rather dense, especially since it assumes the reader is fully conversant in both the statistical methods and the classic models involved. The benefit to the non-economist reader is not an easily digested synopsis of each of these recent studies, although the references are more than adequate for the reader hoping to build a firm background in the literature. The virtue in this report is instead the revelation of the weak spots in the literature on which current policy debates rely.
The report is far more useful than just a debunking of some of the current economic literature and the tendency for overclaiming by those relying on it. It also outlines in summary fashion the actual structure of the current tax structures through which business income is taxed and summarizes the tax rates actually imposed on income derived through various business forms. In particular, Table 1 on page 8 shows different effective tax rates for various alternative forms of organizations under alternative rate structures, assuming a 29.6% individual rate. The range and complexity of the effective rates that could be applicable to domestic business income, depending upon the choice of form and distribution, may come as a surprise to those who deal only with the individual income tax, or with only the corporate income tax. This thoroughness will be helpful for those trying to comprehend the current complexities, not just for those whose expertise is not in corporate tax, but also for those approaching the topic from a legal perspective who need to understand better the economic perspective on the topic.
Finally, the report describes various current proposals pending before Congress. In many ways, this report, like many other CRS reports, documents the preliminary steps taken by Congress but no longer memorialized in committee reports and other once-common types of legislature history. Those unfamiliar with CRS reports more generally—or who think that they are still hard to obtain—should visit the CRS website and explore what Gravelle and her fellow CRS writers have to offer.
Oct 25, 2022 Emily Satterthwaite
Are there more self-employed people, or not? IRS data shows a significant increase in the portion of the workforce reporting positive net income from self-employment on their tax returns. It rose by about 20 percent after 2000, peaking in 2014 at just under 12 percent. However, annual labor force surveys suggest that the self-employment rate has been flat since 2000. How can these two results be reconciled? This question motivates a terrific new paper by Andrew Garin, Emilie Jackson, and Dmitri Koustas entitled, New Gig Work or Changes in Reporting? Understanding Self-Employment Trends in Tax Data.
The authors mine IRS and linked Social Security Administration data to explore two hypotheses. The first hypothesis is that gig work is driving the increase in self-employment. The second is that income-based incentives in the tax code are causing individuals to report more self-employment income. The authors quickly reject the first hypothesis. They use a methodology that allows them to identify whether tax-reported earnings are from an online platform economy (OPE) firm or not. They conclude that OPE work does not explain the increase in taxpayer-reported self-employment. (P. 2.)
Then, the authors explore the tax code’s incentives to report additional income. For individuals with dependents and earned income in the phase-in range for tax credits like the Earned Income Tax Credit (EITC) and Child Tax Credit, reporting additional income results in a larger refundable credit. This could motivate individuals to report self-employment income who otherwise would have reported none. To investigate this, the authors look at the growth in the propensity to report earnings from self-employment across different groups of taxpayers over time. They find that for EITC recipients with children, the propensity to report self-employment income grew from 14 percent in 2000 to over 20 percent in 2010. For childless EITC recipients who lack similar incentives to report additional income (because they face positive marginal tax rates throughout the credit’s phase-in range), there were only modest changes in propensity to report. Further, most of the growth was found among women at the time of first childbirth and was concentrated among households combined wages below the first EITC kink point, where incentives to report are highest. (P. 11.)
The correlation between reporting more self-employment income and eligibility for larger refundable tax credits could mean either a real labor supply response (individuals actually working more in a self-employed capacity) or a pure reporting response, whether related to fake or real self-employment income. To disentangle real labor supply from pure reporting effects, the authors surmise that parents expecting a first child around the end of the year will face uncertainty about the year in which the birth will occur—and the corresponding EITC-eligibility status for that year—until the end of the year, at which point labor supply decisions for that year have already been made. They then use a regression discontinuity approach in which they compare reported self-employment earnings for parents with first births that occur right before the end of a given tax year to those with births that occur right after the end of the tax year.
The new parents with first births in December provide strong evidence that there is a pure reporting response. The authors’ main result is visually striking: the propensity to report self-employment income (but not 1099-third-party-reported income) is higher before January 1 and is concentrated among individuals with W-2 wages in the EITC phase-in range. (Figure 4). By contrast, there is no effect for individuals with wages in excess of the EITC phase-in range. For individuals with an incentive to report, the share reporting self employment earnings increases by an average of 4.6 percentage points from a baseline rate of 10.8 percentage points (43%). (P. 16.) The authors also find that this reporting effect has increased approximately fivefold from 2000 to 2015. This is staggering: among taxpayers with first births in December and January, the entire increase in the propensity to report self-employment income after first births can be accounted for by a pure reporting effect that has grown dramatically over time. (P. 23.)
The next step is to investigate the source of this pure reporting effect. Are individuals fabricating self-employment income on their tax returns to maximize refunds? Or are individuals with actual self-employment income that would have otherwise gone unreported properly reporting that income? (P. 18.) Using data from National Research Program audits of randomly-selected 1040s, they find “that while almost no one incorrectly reported self-employment income in 2001, the share doing so has risen substantially over subsequent years, but only among individuals with a tax incentive [to report fake income].” (P. 19.) However, reporting fake income can explain only a minority (20 percent) of the rise in reporting implied by the authors’ regression discontinuity estimates. (P. 19.) The rest can be attributed to a decrease in under-reporting; that is, an increase in reporting of real self-employment income that otherwise would have gone unreported.
Finally, the authors explore two explanations for the increase in the pure reporting effect: EITC policy expansions that increased incentives to report, and possible changes in individuals’ knowledge of the incentives at stake. They reject the first explanation by looking at a significant EITC expansion in 2009; they find no discontinuity in reporting around that policy change. To explore the second, the authors build on earlier studies showing that the propensity to report exactly the amount of self-employment income that qualifies a taxpayer for the maximum benefit (known as “sharp-bunching”) has spread geographically and increased over time. They use the share of sharp-bunching behavior within 3-digit zip codes as a proxy for knowledge of EITC incentives and find that the propensity to report self-employment income in response to incentives grows significantly with greater knowledge.
In terms of implications, the authors position their results as a cautionary tale about over-reliance on administrative data as compared to survey data. Beyond methodological implications, however, I worry that this paper might be seized upon by those who seek to justify high audit rates of EITC recipients. I take the opposite view: the authors’ estimate that only 20 percent of the pure reporting effect was from outright fabrication (rather than reduced underreporting of real income) seems low, not high. It is evidence that individuals have learned over time how the EITC system works, and and that they overwhelmingly comply. This seems like a very good thing for the tax system. The credits are being delivered in the vast majority of cases as Congress intended because self-employment income that should have been reported in the first place is now being reported. This might help taxpayers form a habit of full reporting of self-employment income that will hold even when tax credits are not at stake. Moreover, the IRS should want to understand the process by which EITC knowledge has disseminated over time so it can try to use those same channels for encouraging uptake of other government programs.
One can only hope that interested policymakers might read this paper carefully before jumping to conclusions about tax credit policy. It would be well worth their time.
Cite as: Emily Satterthwaite,
What’s Going On with Self-Employment?, JOTWELL
(October 25, 2022) (reviewing Andrew Garin, Emilie Jackson & Dmitri Koustas,
New Gig Work or Changes in Reporting? Understanding Self-Employment Trends in Tax Data,
Becker Friedman Institute for Economics (2022)),
https://tax.jotwell.com/whats-going-on-with-self-employment/.
Sep 21, 2022 Diane Ring
Sofia Ranchordás,
Empathy in the Digital Administrative State, __
Duke L. J. __ (forthcoming 2022), available at
SSRN.
Government, no less than the private sector, experiences both the pressures and the allure of digital technology and automation. New technology offers the promise and possibility of delivering services more efficiently, rapidly, and maybe equitably. But there is a distinct risk that, at least for some members of society, this new future provides even less service and fairness than the analog past.
It is that risk, and how we might confront it, that drives Sofia Ranchordás’ new article, Empathy in the Digital Administrative State. Looking specifically at the administrative state and its vast systems of decision making, Ranchordás contends that not only is “empathy” crucial in maintaining democracy and ensuring a system of just and evidence-based adjudication, but that empathy is actually declining with increased digitalization. Moreover, this decline most seriously impacts society’s vulnerable citizens. In Empathy, Ranchordás outlines the challenges faced by the vulnerable engaging with a digital and automated bureaucracy, reviews the existing literature on empathy in public administration, and offers ex post and ex ante empathy-based recommendations for improving the administrative state.
What precisely is the “empathy” that Ranchordás finds missing in the operation of the administrative state? She defines it as “the ability to acknowledge, respond [to] and understand the situation of others, including their challenges and concerns.” Thus, when facing a world in which not all citizens are equally positioned to engage with the digital administrative state and some individuals will be prone to committing mistakes or missing out on important information, Ranchordás believes that “empathy in government” can “close the gap” with “disconnected citizens.” But relying on empathy as a tool for the administrative state rightfully raises concerns about discretion exercised by government officials. Ranchordás recognizes this point but argues that the risks encountered with bureaucracies are increasingly those arising from our engagement with machines and not from our engagement with government officials. Furthermore, she contends that reliance on “empathy” as a tool in law and administration is not new. Ultimately, the article offers recommendations for ex ante and ex post incorporation of empathy into the digital administrative state.
On the ex ante side, governments are encouraged to both question and, where appropriate, limit the reliance on digital and automated engagement with government. Then-Commissioner of the Internal Revenue Service John Koskinen articulated this approach to technology developments in 2016 when he observed that although the IRS would be pursuing a range of innovations to enhance and improve taxpayer service, “[w]e recognize there will always be taxpayers who do not have access to the digital economy or who simply prefer not to interact with the IRS online. We remain committed to providing the services these taxpayers need.” Arguably too, recent reactions against proposed IRS reliance on third-party facial recognition technology to authenticate new online accounts, reflect related concerns. Although critiqued on the grounds of privacy and security, the proposed technology was also challenged for its likely impact on more vulnerable communities.
Ex post, Ranchordás encourages the administrative state to adopt “a duty to forgive and meaningfully assist citizens facing exceptional circumstances” which might include “severe illness, extreme poverty, or any personal challenge that can justify why a citizen is not able to act in a better way, defend their rights and interests, and comply with the law.” Certainly the more this approach is incorporated into a regime ex ante (for example, through use of multiple communication channels to reach individuals who may move location frequently, or through a legal provision granting individuals the right to appeal based on explicit categories of hardship) the less likely that discretion becomes an untenable power of the bureaucrats. But Ranchordás envisions ex post empathy in the administrative state that does “not amount to numerous individual exceptions that fully dismantle the efficiencies that automated systems may give rise to and create legal uncertainty.” Whether this balance can be achieved remains unclear.
Ranchordás’ interest in what happens to those in society who fail to thrive in the digital administrative state — those who make mistakes and miss opportunities to which they are entitled — resonates with earlier work that my co-author Shu-Yi Oei and I did in “Slack” in the Data Age. Our article considered the broader question of how increasingly ubiquitous data and new technological innovations now available to government and related enforcement activities renders everyone’s mistakes more visible but does so unevenly with the most vulnerable at the greatest and disproportionate risk of exposure. Here, Ranchordás takes aim specifically at the administrative state and its power to reduce some of the new risks facing the more vulnerable. How governments respond—and whether they can find a stable path forward with empathy—will shape our administrative systems in the age of digitalization and automation.
Aug 10, 2022 Daniel Shaviro
As the saying ought to go, those who forget history are doomed to miss out on a lot of great stories. In Rebellions, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages, Michael Keen and Joel Slemrod do their formidable best to save us from this dire fate. They also amply fulfill their aim of proving the truth of their opening quotation, from H.L. Mencken, to the effect that taxation is not just “eternally lively” but of greater interest than “either smallpox or golf.”
Keen and Slemrod are also so impressively comprehensive in their self-set task of combing thousands of years of history, across multiple continents, for enjoyable or illuminating tax anecdotes that I started to take it as a challenge. I read a lot of history books on the side. So, could I think of stories worth including that they had left out?
This did not go so well. Taxes as the subject of the Rosetta Stone? Check. Window taxes, salt taxes, beard taxes, and taxes on bachelors? Of course. Classic-era British rock lyrics complaining about high taxes? Everyone knows about the Beatles in “Taxman,” but what about the Who in “Success Story”? Or the Kinks in “Sunny Afternoon”? Yes, they have all three.
The only thing I was able to come up with that appears not to be in the text was Morton’s Fork. When the avaricious usurper Henry VII was king of England (after overthrowing fellow usurper Richard III), he sent the Archbishop Henry Morton on a tour of noble households, demanding fiscal contributions to the throne. Nobles had two distinct approaches to pleading poverty, but neither worked. Morton “reasoned that anyone who was living extravagantly was rich, and so could afford high taxes, whereas anyone who was living frugally had saved a lot, and so could afford high taxes.” Surely there is a parable lurking here about the complementarity of consumption taxes and wealth taxes.
The book’s rewards extend no less to the wide range of lessons learned, than to the wide range of delightful anecdotes. All too often, tax writers’ use of ancient history is drearily predictable. It comes as no surprise that the Cato Institute once ran an article entitled “How Excessive Government Killed Ancient Rome,” emphasizing how “steep taxes…severely depressed economic growth” in the Roman Empire (written by the great Bruce Bartlett before his work became extremely interesting). Likewise, the Business Insider tells us, courtesy of the self-proclaimed Sovereign Man, that “Taxes Brought Down the Roman Empire, and They’ll Do the Same to America.” This is all so routine that one is tempted to ask: Can I get fries with that?
Keen and Slemrod, however, are after far more diverse and interesting game. They use their examples to illuminate concepts ranging from deadweight loss, to Ramsey taxation, to tax incidence, to line-drawing, to interest group politics, to tax competition, to tax evasion versus avoidance, to the other type of kink (involving notches in the tax system).
Among the book’s virtues is its righteous commitment to verifying seemingly tall tales when possible, while debunking stories that perhaps ought to be true, but aren’t. For example, the Boston Tea Party responded not to outrageous colonial exploitation (which the British at the time were reserving for India) but to a quite modest levy, especially compared to the taxes the English were paying at home. That levy was in fact embedded in an overall after-tax price cut for tea, the proceeds from which were “earmarked for the defense of the colonies.” (P. 6.)
We also learn, however, that there are “disappointingly…few insights about the future of taxation to be gleaned from science fiction.” (P. 373.) The problem is that science fiction writers, while often so intellectually creative, have on this topic pretty much limited their thinking to imagining interplanetary tax revolts. How mundane, compared to such real-world examples as an Incan tax that was payable in head lice.
This is both a delightful and imaginative book, and a startlingly instructive and informative one. Despite all the humor, it is actually very serious in the best way. As Keen and Slemrod rightly tell us in the preface, “while rebellions will always be with us, taxes will always invite rascality [a well-chosen word that I have never previously seen in a tax article or book], and follies will always happen, we hope this book may bring a little more wisdom to the future of taxation.” (P. xviii.)
Cite as: Daniel Shaviro,
Tell Me a Tax Story, JOTWELL
(August 10, 2022) (reviewing Michael Keen & Joel Slemrod,
Rebellions, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages (2021)),
https://tax.jotwell.com/tell-me-a-tax-story/.
Jul 12, 2022 Neil H. Buchanan
Do the goals of fairness, equity, social justice, or other explicitly normative approaches to analyzing law and policy have any place at all in modern scholarship? Some scholars, especially those who approach the world from an orthodox economic viewpoint, have tended to reject categorically the very idea that such concepts should supplant their purportedly hard-headed analysis–an analysis that they hold out as being superior to supposedly “soft,” “sentimental,” “moralistic,” or “subjective” anti-orthodox approaches. Increasingly, however, equity-based analysis has at least been permitted as a component of most legal scholarly discussions. That itself is progress.
Even so, there continues to be a presumed distinction between self-styled “objective” approaches and the approaches of those who focus on inequality, domination, and other such fundamental questions of social justice. The familiar “equity-efficiency tradeoff” encapsulates this tension, the notion being that there are two distinct analytical categories that are not merely separate but in opposition to each other–-that is, the tradeoff says that we must sacrifice some efficiency if we desire greater equity, or instead that we must agree to doom more people to poverty if we seek to maximize efficiency. But is there a better approach? Happily yes, as Taxation and Law and Political Economy, by Professors Bearer-Friend, Glogower, Jurow Kleiman, and Wallace, clearly suggests.
The article outlines these familiar ideas and then takes some serious steps toward considering the strong conclusion that the efficiency concept is analytically incoherent. And although they stop short of embracing that idea fully, their new article admirably lays the groundwork for future scholarship (perhaps to be written by those authors themselves, individually or in various combinations) finally to embrace the conclusion that efficiency analysis is logically vacant. Their article does so many things well that I can hardly disparage them for not going as far as I think they should, especially because they go out of their way to be careful and modest in their conclusions.
The somewhat ungrammatical title of their article is a result of the authors’ engagement with a scholarly movement known as “Law and Political Economy” (LPE), which the authors rightly believe could be enhanced by including justice-based arguments drawn from legal tax scholarship. Hence the two “ands,” adding tax to an existing “and” canon.
The authors note (P. 527) that LPE scholars have argued that “market-centric analytic modes of legal thought dominant in recent decades have been inadequate to” the task of addressing the many crises facing the world today. Meanwhile, “tax scholarship has continuously engaged with the role of economic difference in the law,” which means that “LPE’s success in reorienting legal though [sic] will depend in part on its engagement with questions of tax and fiscal policy.” (P. 528.) Conversely, they argue that “[t]ax scholarship can benefit from LPE’s … skepticism of analysis premised on an autonomous market and that prioritizes efficiency and neutrality.” (Id.) It is that latter point–supposed market neutrality–that is the Achilles Heel of orthodox analyses and is thus the key to making progress toward the authors’ goals.
At times, the article is suitably bold, for example, arguing in conclusion that “[l]egal reforms that respond adequately to the current moment will require innovative and radical thinking.” Does this article do that, that is, does it engage in innovative and radical thinking? Innovative, yes. Radical, however, is more of a work in progress. Notably, the article’s only other uses of the word “radical” are in two footnotes (citing other other authors’ uses of that word) and twice above the line to describe other scholars’ proposals to impose unusually high tax rates on the rich. There are plenty of synonyms, of course, but the larger point is that the essence of the authors’ conclusions is somewhat disappointingly cautious.
Perhaps I am being unfair, however, as I am constructively critiquing an especially fine piece of work written by four academics, not all of whom yet have tenure. Were I their mentor, I would have agreed that caution is the order of the day. Beyond that, however, it is possible to read their analysis as an everything-short-of-saying-so invitation to others to draw the obvious conclusion that efficiency and neutrality are (and always have been) intellectual dead ends. Indeed, I think that that is the fairest way to read what they are doing in this article, because they so clearly expose what is wrong with the efficiency/neutrality orthodox approach. Importantly, Section III.B.2, “The Private Market as a Public Creation,” points to the breakthrough book by Liam Murphy and Thomas Nagel, The Myth of Ownership, which demonstrated that the notion of an autonomous economic market existing logically prior to law (and thus government) is incoherent.
After all, as the authors point out, “the tax system, like other areas of law, results from politically contingent policy choices, rather than the objective application of neutral or objective theoretical principles.” (P. 528.) Even so, their very next paragraph seems to back away from the obvious concluding step, instead offering what could amount to a balancing test: “This approach would recognize the value of efficiency-based frames, albeit when properly contextualized and subordinated to the supervening values that the LPE reorientation prioritizes.” (Id.)
But I use the phrase “seems to back away” here because, in light of the analysis in the article, being “properly contextualized and subordinated” to LPE’s rejection of market idolatry necessarily means doing what Murphy and Nagel and others (including me, in much of my own work) have done. That is, subordinating an efficiency-based frame is necessarily to reject efficiency as a primary guide to analysis. We can no longer view legal or policy analysis as either/or matters–the hoary efficiency/equity tradeoff–or even both/and approaches. Instead, it is at most a two-step hierarchical process: (1) identify our values and goals, and only then (2) decide how to achieve those goals in a way that upholds and advances them without causing ancillary effects that we view as unnecessary and undesirable.
For example, if we want to reduce inequality by imposing wealth taxes, we can dispense with the standard objection (“But that will be inefficient, because wealth is a legal right!”) and instead point out that the new legal rights that redistributive taxation will create are no less legitimate than those that they supplant. Instead, we proceed as the authors suggest. Step 1: Redistribute wealth to achieve goals of justice and equity; then Step 2: Choose the method of wealth distribution that improves the largest number of people’s lives.
In the end, this article constitutes an important step forward, arguing at the very least that the old orthodox approach that treats markets as autonomous and logically prior to law is no longer tenable (and, I would add, never was) and at most that what we used to think of as a co-equal goal of policy analysis–efficiency–is merely a secondary matter of choosing the most useful means to reach our chosen ends. I might even call that radical.
Jun 9, 2022 Dorothy Brown
Professor Goldburn Maynard’s excellent Essay: Biden’s Gambit: Advancing Racial Equity While Relying on a Race-Neutral Tax Code, analyzes the Biden’s Administrations efforts to advance racial equity through the American Rescue Plan Act (ARPA) enacted by Congress and signed into law on March 11, 2021.
The first executive order that President Biden signed once sworn into office was Executive Order No. 13,985, designed to advance racial equity throughout his Administration including various federal agencies. ARPA contains some provisions that exemplify the language and spirit of Executive Order No. 13,985. That set the new Administration on a collision course with the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), which have both been devoted to the idea of colorblindness when it comes to tax data. The IRS for example does not publish statistics by race, even though it has done so by age and gender. As Professor Maynard points out, Biden Administration efforts also conflicted with federal courts, which similarly operate with a colorblind jurisprudence. In Professor Maynard’s observation, parts of ARPA, such as distributing aid through the tax system, only indirectly and inadequately pursued racial equity goals. Others, such as debt relief for socially disadvantaged farmers or ranchers, were colorblind casualties.
As Professor Maynard points out, racial equity does not rely on equal treatment, but fairness in treatment including access to resources. Racial equity seeks to address historical disparities and minimize or eliminate systemic racism.
But let’s begin at the beginning…what is racial equity? Professor Maynard provides the overall definition, which “requires treating individuals differently based on need.” (P. 661.) He notes that programs targeted at reducing or eliminating poverty do not satisfy the definition of racial equity, as racial equity requires a “more comprehensive dismantling of oppressive systems.” (P. 663.) In one of the article’s signature contributions, he provides us with three questions that help identify whether a provision or policy promotes racial equity in the long run.
(1) Does the policy target individuals or groups based on need?
(2) Is the policy race conscious either by targeting aid to a racial group, ensuring equitable delivery of benefits, or ensuring that they are disproportionately targeted at disadvantaged minorities?
(3) Does the policy tackle root causes of racial inequality and remove barriers keeping certain racial groups disadvantaged? (P. 664.)
There were ARPA provisions that targeted the poor and disproportionately helped racial minorities, yet there were other programs that were specifically designed to address the root causes of current disadvantage by addressing systemic racism. The expanded child tax credit extended to Americans with no taxable income was an example of the former, while the debt relief program for disadvantaged farmers was an example of the latter.
As Professor Maynard describes it, a good portion of the stimulus package in ARPA, including the expanded child tax credit, was focused on distributing aid through our tax system. One of the many strengths of the article is his observation of the irony of the Administration using the tax code to advance racial equity given how “the IRS does not collect racial data on taxpayers. Rather, it exists as a colorblind agency, with neither the Form 1040 asking about race nor the agency including race or ethnicity in its published data analysis.” (P. 658.) He argues that a provision like the child tax credit addresses racial equity indirectly and inadequately, burdened by the disadvantage of the colorblind approach of the IRS and Treasury.
While Professor Maynard describes five policies or programs in ARPA that more squarely addressed systemic racial inequity relating to education, farming, housing, small businesses, and state and local aid, I want to focus on his treatment of the Biden Administration’s efforts for farmers – specifically black farmers. As Professor Maynard notes “ARPA also sought to address the impact of systemic discrimination on minority farmers.” (P. 669.) He then describes the decades of racial discrimination imposed by the U.S. Department of Agriculture on black farmers that resulted in a civil rights class action lawsuit by black farmers. ARPA included a debt relief provision for “socially disadvantaged farmers or ranchers (SDFR), including Black/African Americans, American Indians or Alaskan Natives, Hispanics or Latinos, and Asian Americans or Pacific Islanders. The Department could pay as much as 120% of each farmer’s or rancher’s debt on loans it made or guaranteed. Any socially disadvantaged borrower with direct or guaranteed farm loans as well as Farm Storage Facility Loans qualified for the aid.” (P. 670.) Almost immediately, a lawsuit was filed by white farmers excluded from the debt relief provisions of ARPA.
This provision could have made significant contributions towards achieving racial equity. But it has been defanged through injunctive relief issued by federal courts. Like IRS and Treasury, federal courts are limited by their colorblindness.
Professor Maynard describes the legal landscape of Supreme Court precedent as treating “efforts to dismantle systemic racism the same as attempts to impose racial segregation.” (P. 673.) He provides an excellent and accessible primer on Supreme Court precedent which makes government policies that classify people by race presumptively unconstitutional. In order to rebut the presumption, the government must show that it is necessary to support one race over another in order to “achieve a compelling state interest.” (P. 674.) But even if a government can show a compelling state interest, the government policy must be “narrowly tailored.” He correctly points out that this is a standard which “few programs survive.” (P. 674.) Unsurprisingly, a federal district court granted a preliminary injunction against the Biden Administration on behalf of the white plaintiffs challenging the debt forgiveness provisions in Miller v. Vilsack. The Biden Administration flunked the narrowly tailored requirement when their evidence “did not demonstrate specific instances of intentional discrimination against SDFRs who hold qualifying USDA loans. And any SDFRs who may have experienced racial discrimination but did not hold qualifying loans were not eligible for the relief….” (P. 677.)
Professor Maynard wryly observes that “[w]ith courts standing in the way, [racial equity] must be promoted in a neutral, indirect way that ignores systemic discrimination.” (P. 679.) Perhaps however it is the Biden Administration that should bear some responsibility for not engaging in better fact finding to prove its legislative scheme was narrowly tailored. Nevertheless, Professor Maynard’s conclusion is more than supported by constitutional precedent. Ultimately, Professor Maynard believes what is needed is “both targeted and universal programs to tackle inequality.” (P. 686.)
Professor Maynard ends on a positive note by observing that there is momentum building for racial equity work. He cites as examples sentencing disparities being reduced, support from President Biden for a commission to study reparations for slavery and segregation, and steps the Biden Administration has taken to work towards ending housing discrimination. Here’s hoping that momentum leads to increased racial equity outcomes.
