The Journal of Things We Like (Lots)
Select Page

An Empirical Assessment of the Likely Impact of the International Provisions of the TCJA

Dhammika Dharmapala, The Consequences of the TCJA’s International Provisions: Lessons from Existing Research, CESifo Working Paper No. 7249 (Oct. 31, 2018), available at SSRN.

The international provisions of the Internal Revenue Code are among its least well understood. Public Law 115-97, known informally as the “Tax Cut and Jobs Act” (TCJA), made significant changes to those provisions. One of the best evidence-based articles exploring the likely effects of those changes is Dhammika DharmapalaThe Consequences of the TCJA’s International Provisions: Lessons from Existing Research, CESifo Working Paper No. 7249, a second version of which was posted on SSRN in late October. In it, Dharmapala reviews the existing econometric literature and uses that literature to project the likely long-term consequences of those changes. Anyone interested in international tax policy will benefit from working through his evidence and conclusions.

Although Dharmapala initially defines his task in broad terms—“to review the most important of these new international tax provisions and to discuss their potential consequences, drawing on existing scholarly literature”—he ultimately narrows his focus to ownership distortions, distortions that implicate what is known in the literature as “capital ownership neutrality.” He does not, for example, explore generally the likely effects of TCJA on incentives to offshore business operations or incentives to income-shift within a consolidated group. Instead, he notes that pre-TCJA, (1) “US MNCs [multinational corporations] [were] disfavored as vehicles for global portfolio investment” and (2) “the US tax imposed upon the repatriation of dividends created an incentive to delay repatriation, and led to the accumulation of cash holdings…in foreign affiliates,” and asks whether the new changes are likely to ameliorate or exacerbate these distortions.

As to the first, he observes that “much of the impetus for international tax reform was spurred by concern about the US tax burden on US residence; a growing body of evidence suggested that the resulting distortions were quite large….Yet, the TCJA contrives to make this problem arguably even worse.” (By “US residence” he means US parentage of multinational groups.) The new tax on global intangible low-taxed income (GILTI), in particular, “burdens US residence, and…may do so to greater extent than the repatriation tax regime it replaces.”

The tax on GILTI, moreover, creates a new distortion: “The GILTI tax instead encourages US firms to acquire tangible assets in foreign countries, regardless of the local tax rate.” “US MNCs become tax-favored buyers of routine foreign tangible assets.” This violates capital ownership neutrality and creates dead-weight loss.

“In summary,” he concludes, “the TCJA may well increase the tax burden of US residence for many (and perhaps most) US MNCs. It follows that the TCJA is unlikely to generate the types of benefits documented in the empirical literature on the territorial reforms carried out in the U.K. and Japan. Rather, the impetus for inversions, the competitive disadvantage for US MNCs in cross-border acquisitions, and the tendency for US MNCs to be disfavored as vehicles for portfolio investment will continue (indeed, possibly to an even greater extent than before).”

As to repeal of the so-called repatriation tax, Dharmapala concludes that the “primary impact of increased repatriations is an increase in shareholder payout.” He bases this conclusion in significant part on his work on the effects of the 2004 repatriation tax holiday effected by the American Jobs Creation Act: “the AJCA [repatriation tax holiday] had no detectable impact on US investment or employment levels.” As a result, he concludes that “efficiency gains [from repeal of repatriation tax] are likely to be modest.” Importantly, he finds “no evidence supporting the claim that increased repatriations will increase US wages.”

The importance of having an economist with Dharmapala’s depth of knowledge and familiarity with the empirical literature writing about these issues cannot be overstated. I had reached similar conclusions using a purely theoretical model. Theodore Seto, Modeling Changes in U.S. International Tax Rules, Tax Notes, April 8, 2019. Theory, however, is never an adequate substitute for fact.

In his closing paragraph, Dharmapala concludes that “the TCJA provides an illustration of the definition of politics…as ‘the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” Unfortunately, his analysis persuasively supports this rather bleak assessment.

Cite as: Theodore P. Seto, An Empirical Assessment of the Likely Impact of the International Provisions of the TCJA, JOTWELL (May 1, 2019) (reviewing Dhammika Dharmapala, The Consequences of the TCJA’s International Provisions: Lessons from Existing Research, CESifo Working Paper No. 7249 (Oct. 31, 2018), available at SSRN),

Give the Digital Services Tax a Chance

  • Wei Cui, The Digital Services Tax: A Conceptual Defense (Oct. 26, 2018), available at SSRN.
  • Wei Cui & Nigar Hashimzade, The Digital Services Tax as a Tax on Location-Specific Rent (Jan. 23, 2019), available at SSRN.

Proposals from the European Council and the UK governments to introduce a digital services tax (DST) took those of us who haven’t been watching the field as closely as we should have by surprise. A DST might be levied on a revenue base, such as revenue from selling online advertising, intermediary services or data; at a low rate, perhaps 3%; on companies that exceed a size threshold, such as total revenue of 750 million euros. Coming in the wake of a protracted period in which the Organisation for Economic Co-operation and Development focused on negotiating arguably minor changes to the international tax framework (through the “base erosion and profit split” (BEPS) project), the DST seems to be moving like a high-speed train.

Scholars and policy makers have made efforts to justify (or contest) the normative underpinnings and economic consequences of the DST. In this context, two related papers—one by Wei Cui and Nigar Hashimzade and the second by Wei Cui—offer some helpful and novel analysis.

The major claim of both papers is that the DST can be justified as a means for taxing location-specific rents. The authors accept that other justifications (for example, destination-based apportionment or inter-nation equity concerns about source taxation) may also serve to support the tax; but they suggest that the location-specific rents justification might be more compelling to the DST’s critics.

For relative novices in this area of tax policy, Cui’s Conceptual Defense article offers a welcome entry point. Four aspects of that paper should be highlighted. First, Cui lays out the distinctive economic characteristics of digital platforms that affect their appropriate tax treatment: “(i) network effects that generate market power, (ii) two- or multi-sided business models that involve complex pricing choices in profit maximization, (iii) negligible marginal cost, and (iv) geographic mobility in the location of service delivery and profit recognition” (P. 3.) Cui accepts that these features justify considering new approaches to international taxation. He urges us to think not about whether a DST is appropriate, but instead to turn our attention to its best design.

Second, he calls on us to abandon some of the common tax treaty obsessions. Notably, he argues that expanding the scope for income tax treaties to cover DSTs (in Article 2) and fussing about the definition of permanent establishment (in Article 5) are unimportant diversions. I agree.

Third, he offers compelling rationales for the DST. It is a tax that captures location specific rents (which are created by digital platforms’ direct and indirect network effects). The taxation of advertising revenue is a form of designation-based formulary apportionment. And, the collection of data should be sufficient to generate a tax base. Elaboration of these arguments comprises a substantial portion of Cui’s Conceptual Defense paper.

Fourth, Cui’s paper throws into relief the difficulty of prioritizing a corporate profits tax with arm’s length allocations over a unilateral turnover tax (the DST) in this context.

Cui’s Conceptual Defense paper offers a good starting place for readers. It describes the current context and initiatives; for legal readers it highlights a few of the legal debates around the DST; and it opens the door to conversations about appropriate DST design in the light of alternative possible justifications.

The second paper, The Digital Services Tax as a Tax on Location-Specific Rent, is for more committed readers. Here, Nigar Hashimzade and Wei Cui turn to an extended rationalization of the DST as a tax on location-specific rent. In this paper, the authors analogize the tax to familiar taxes on natural resources. More boldly, they claim that when some conditions are met, the DST may be a better tax on location-specific rents than resource royalties. The paper offers a considerable economic analysis that may not be helpful for all law readers, but it is nevertheless possible to engage with much of the authors’ arguments even if parts of the paper are glossed over. Interestingly, the paper concludes with some nods to the inter-nation equity implications of the DST.

Cite as: Kim Brooks, Give the Digital Services Tax a Chance, JOTWELL (March 21, 2019) (reviewing Wei Cui, The Digital Services Tax: A Conceptual Defense (Oct. 26, 2018), available at SSRN. Wei Cui & Nigar Hashimzade, The Digital Services Tax as a Tax on Location-Specific Rent (Jan. 23, 2019), available at SSRN. ),

Morality and the 2017 Tax Act

Linda Sugin, The Social Meaning of the Tax Cuts and Jobs Act, 128 Yale L.J. Forum (Oct. 25, 2018).

I am on alert for tax law changes as I teach Federal Income Tax this semester for the first time since the passage of the 2017 tax act. They seem to appear out of nowhere, rather than as part of a predictable pattern. What can explain seemingly disconnected provisions, scattered throughout the Code and enacted without an explicit policy explanation?

Linda Sugin takes on this question in The Social Meaning of the Tax Cuts and Jobs Act, published in 2018 at the Yale Law Journal Forum. Her critical perspective makes an effort to divine the worldview embedded in the TCJA based on the content of the enacted law. Sugin’s engineering effort shows the following “American priorities and values revealed by the TCJA:

  1. The traditional family is best;
  2. Individuals have greater entitlement to their capital than to their labor;
  3. People are autonomous individuals;
  4. Charity is for the rich; and
  5. Physical things are important.” (P. 404.)

Sugin reviews dozens of provisions to support her arguments. A sampling follows to offer a sense of her argument.

The TCJA, argues Sugin, reveals its traditional family bias through a number of provisions, including rate bracket changes and the replacement of the dependent care credit (helpful for two-working-parent families) with an increase in the generally-available child tax credit. Another change imposes a $500 fine on a tax preparer who fails to diligence a taxpayer’s claim of head of household status—a filing position designed to help low—and middle-income single-parent families. This last provision prompts tax preparers to be skeptical when a client says she is a single parent. No such incentive is presented when two clients say that they are married.

The TCJA’s preference for capital income over labor income is revealed by a reduced corporate income tax, as well as by the Section 199A deduction for 20% of so-called “qualified business income” earned through certain passthrough entities and subject to income phaseouts. Sugin similarly objects to the TCJA’s apparent preference for investments in physical capital rather than human capital, such as the provision for immediate expensing. She writes, “All of these changes favor things over people.” (P. 430.) Sugin’s point here is about morality, not about the efficiency problems that others have pointed out. She objects to the TCJA’s message that taxpayers have an inferior claim to the income from their own labor, relative to the claim to their income from physical or financial capital.

Sugin says that the people idealized and favored by the TCJA are autonomous economic units, not social humans embedded in networks of interactions like employment or state and local communities. Provisions including the passthrough deduction and the repeal of miscellaneous itemized deductions favor independent contractors over employers. Limiting the annual state and local tax deduction to $10,000 communicates that these taxes are a form of private consumption, rather than a tithe to a common fund. Increasing the standard deduction exacerbates the result that only higher people will get any incremental benefit from charitable donations and “undervalues the types of institutions supported by the poor.” (P. 426.)

Sugin is surely right to say that “efficiency is a value” (P. 405) and to point out that law cloaked in the garb of efficiency or competitiveness nevertheless has social meaning. This legislation has winners and losers, even if rhetoric about efficiency obscures this fact. Perhaps legislators did not willfully intend to favor swashbuckling primary-earner investors with stay-at-home spouses, rather than risk-averse single-parent employees. Nevertheless, Sugin shows results that are there, enacted in the statute. As Sugin points out, the law itself communicates values and reveals over time its embedded social meaning.

Cite as: Susan Morse, Morality and the 2017 Tax Act, JOTWELL (March 4, 2019) (reviewing Linda Sugin, The Social Meaning of the Tax Cuts and Jobs Act, 128 Yale L.J. Forum (Oct. 25, 2018)),

Increasing EITC Take-up in the Age of TurboTax

Jacob Goldin, Tax Benefit Complexity and Take-Up: Lessons From the Earned Income-Tax Credit, available at SSRN.

One dilemma for policymakers is how to get people to take advantage of social welfare programs. In the case of the Earned Income Tax Credit (“EITC”), the goal is to encourage eligible individuals to claim the credit on their tax return. Take-up rates for the EITC are quite good (about 80% overall), but ideally would be higher. Typically the approach to increasing EITC take-up is information campaigns, like EITC awareness day. The conventional wisdom has been that the more people know about the EITC, the more likely eligible recipients are to claim it. But is it right that advance notice is important? If people use tax software that will automatically calculate the EITC for them, how important is it that they are made aware of the benefit ahead of time? Perhaps not very, as suggested by Jacob Goldin in his forthcoming article, Tax Benefit Complexity and Take-up: Lessons from the Earned Income Tax Credit.

The key insight from Goldin’s article is that in the modern age, virtually anyone who files a tax return is presented with the opportunity to claim the EITC. This is because the vast majority of taxpayers—96 percent in 2015 according to Goldin—use assisted preparation methods (“APMs”) such as self-preparation software or a tax return preparer. Using either of those methods, it is extremely unlikely to fail to claim the credit accidentally. (Though, as Goldin notes, some taxpayers may consciously choose not to claim the credit even though they are eligible.) The paper’s main conclusion is logical yet important: people who are eligible for the EITC but who fail to claim it are generally people who fail to file returns at all. Thus, if policymakers want to increase EITC take-up, they must increase the filing rate.

Goldin frames the article by analyzing the complexity of the EITC. In doing so, he introduces a novel and important taxonomy into the tax literature that is useful beyond the specific context of the EITC. Goldin’s taxonomy distinguishes between “informational complexity” involved in claiming tax benefits and “computational complexity.” Informational complexity involves the level of difficulty in compiling the inputs for claiming a benefit, both in terms of how much information is required and how hard it is to compile the information. For example, the EITC requires information about age, income, marital status, dependents, and several other inputs. On the other hand, computational complexity describes the difficulty in actually calculating the taxpayer’s eligibility for the credit and determining the amount of the credit. For example, determining whether a minor is a qualifying child, and applying the credit’s phase-in or phase-out rules, are both part of the EITC’s computational complexity.

Tax benefits might have high levels of one type of complexity and low levels of another. For example, as explained by Goldin, the charitable deduction is easy to calculate (low computational complexity), but may have high informational complexity because it requires taxpayers to keep good records of what donations they have made during the year. The EITC, Goldin argues, is low in informational complexity because the information required is easily knowable by taxpayers (e.g., age and marital status), easy to obtain if not already known, and is often already required for other purposes on the tax return. The computational complexity of the EITC, on the other hand, is quite high.

The EITC’s classification as low informational complexity/high computational complexity is important because computational complexity is easily overcome by APMs. Software used either on a self-prepared return or by a tax return preparer will calculate the amount of the EITC in seconds once the required inputs are provided. Thus, Goldin concludes, computational complexity should not be a barrier to take-up for anyone filing a return with an APM (i.e., the vast majority of people filing returns). Similarly, informational complexity should not be a barrier because, although APMs do not eliminate informational complexity, informational complexity is low for the EITC.

Important policy prescriptions flow from this analysis. First, Goldin argues, efforts to increase EITC take-up should focus on increasing the filing rate among taxpayers who are eligible to claim the EITC and who do not otherwise file. Relatedly, efforts to raise EITC awareness are probably ineffective at increasing take-up, except to the extent those efforts encourage return filing among non-filers. Further, Goldin argues, current EITC awareness campaigns are unlikely to increase the filing rate among eligible non-filers because awareness of the credit does not help taxpayers understand if they would be eligible and what the amount of their refund would be. This is consistent with research showing that mandatory employer notices of the EITC are not linked to higher take-up rates.

How should we encourage EITC-eligible non-filers to file? Goldin’s article offers a number of creative proposals here aimed at increasing the actual or perceived benefit of filing. For example, one approach would be to alter the withholding tables so that taxpayers eligible for the EITC would be owed a bigger refund at the end of year, thus increasing the economic benefit of filing. One potential drawback to this approach, though, is that EITC-eligible taxpayers are more likely to experience liquidity problems during the year from over-withholding. Another possibility would be to limit government programs that offset tax refunds (e.g., programs that automatically divert tax refunds towards things like child support obligations), since these programs likely deter eligible claimants from filing a return. However, as acknowledged by Goldin, limiting these programs would undermine the policy goals of those programs (e.g., making sure child support obligations are paid).

Yet another approach would be to increase awareness of free preparation assistance (e.g., VITA programs and the IRS’s FreeFile program). Goldin acknowledges that these free programs have some drawbacks and programs like VITA may need to be expanded if the number of low-income filers significantly increased. Other forms of information may also encourage more eligible taxpayers to file and claim the EITC. For example, if taxpayers currently perceive the monetary benefit from filing to be too low, providing taxpayers with more personalized estimates of their potential refund amount may increase filing rates. The unifying theme here is that these informational campaigns would be aimed at increasing awareness of the benefits of filing, as opposed to awareness of the credit itself.

Increasing EITC take-up by increasing awareness of the credit itself made sense in previous decades. As Goldin points out, about one-third of taxpayers self-prepared their returns in 1998, making it more likely that eligible filers would fail to claim the EITC on their returns. But due in large part to the prevalence of tax preparation software, the number of taxpayers filing without some preparation assistance is approaching zero. As the tax return preparation landscape changes, so must our approach to encouraging eligible individuals to claim social welfare benefits through the tax system. Goldin’s article, and his focus on taxpayers’ filing rate, provides important guidance to the IRS and policymakers in this regard.

Cite as: Kathleen DeLaney Thomas, Increasing EITC Take-up in the Age of TurboTax, JOTWELL (February 15, 2019) (reviewing Jacob Goldin, Tax Benefit Complexity and Take-Up: Lessons From the Earned Income-Tax Credit, available at SSRN),

Bridging Exceptionalism and Anti-Exceptionalism with the JCT Canon

Clint Wallace, Congressional Control of Tax Rulemaking, 71 Tax L. Rev. 179 (2017), available at SSRN.

In its 2011 decision in Mayo Foundation for Medical Education and Research v. United States, the Supreme Court held that most if not all general authority Treasury regulations carry the force of law and, thus, are eligible for judicial review and deference under the Chevron standard. In reaching that conclusion, the Court reiterated its general presumption in favor of “maintaining a uniform approach to judicial review of administrative action” and, correspondingly, rejected “an approach to administrative review good for tax law only.” But the Court qualified that presumption at least a bit—noting the taxpayer’s failure to “advance[] any justification for applying a less deferential standard of review to Treasury Department regulations,” and thereby suggesting that good reasons for tax exceptionalism might exist on another occasion. With Congressional Control of Tax Rulemaking, Clint Wallace advocates at least some amount of tax exceptionalism in judicial review of Treasury/IRS regulatory interpretations of the Internal Revenue Code. Or does he?

In the wake of Mayo, scholars writing about tax administration have divided loosely into exceptionalist and anti-exceptionalist camps. The exceptionalists may not reject Mayo’s particular holding, but they otherwise prefer the pre-Mayo status quo and seek to justify tax exceptionalism from one or many administrative law requirements, doctrines, or norms. The anti-exceptionalists see independent value in bringing tax administration more into line with general administrative law, so they would impose a higher bar—e.g., an affirmative statement of congressional intent—before permitting tax exceptionalism. Obviously, this characterization is over-generalized, as it is more accurate to portray exceptionalism and anti-exceptionalism as two ends of a continuum rather than a pure binary choice. Still, much scholarship in this area adopts a tone and reflects assumptions and preferences that clearly lean one way or the other. And yet, although Wallace’s article advances an exceptionalist argument, to the eye of this anti-exceptionalist writer, his reasoning and analysis suggest that the two camps may not be so far apart after all—at least not with respect to statutory interpretation.

Moreover, regardless of which camp one falls into, it is undeniable that exceptions from general administrative law principles abound across the administrative state. Every agency is at least somewhat unique. Preventing rampant exceptionalism from completely undermining the general policy of administrative law uniformity requires comparative evaluation of which differences—whether in terms of statutory requirements and responsibilities, agency design, or administrative practices—should matter and which should not. Undertaking that sort of comparative evaluation requires identifying the differences (and recognizing the similarities) among agencies in the first place.  Relatively little legal scholarship exists to serve that function. Wallace’s article helps to fill that void, most especially in its discussion of the role of the Joint Committee on Taxation in the tax legislative process.

Wallace starts with the premise that the first goal of general administrative law requirements, doctrines, and norms is to promote political accountability in the modern administrative state. He then focuses on two particular doctrines—Chevron and State Farm—that judges use in evaluating agency regulations, and two key aspects of tax administration that he says make tax administration unique and justify approaching judicial review of Treasury regulations differently.

First, Wallace examines and emphasizes the role of the Joint Committee on Taxation and its staff in the tax legislative process and, relatedly, in helping Congress provide an unusual level of guidance to tax administrators in the form of greater statutory specificity and more elaborate legislative history. As a result, and citing a study by David Epstein and Sharyn O’Halloran, he posits that Congress delegates less discretionary authority to Treasury and the IRS than it does to other government agencies. Thus, Wallace concludes, “the JCT facilitates congressional control of tax rulemaking, which can provide political accountability, allows for reliance on expertise in policy formulation, and can provide benefits in terms of certainty for taxpayers.”

Second, Wallace examines public participation in notice-and-comment rulemaking in the tax context—documenting and evaluating public comments received in response to 106 notices of proposed rulemaking issued by the Treasury Department in 2013, 2014, and 2015. Most of the proposed Treasury regulations received few comments, and a quarter received no comments at all. When comments were received, the commenters “were heavily weighted towards private interests” as determined based on their identity, although Wallace acknowledges “[s]cholars have found—and expressed concerns about—low public interest participation in rulemaking undertaken by other agencies.” Also, citing anecdote, he suggests also that comments from taxpayers “describe the effects of” proposed Treasury regulations “in service of avoiding higher tax liability” rather than providing “useful data or insights to inform the rulemaking process.” From this evidence, Wallace concludes that “the notice and comment process does not elicit broad and diverse participation” and “is most often a poor mechanism for achieving key normative goals of administrative law in the tax regulatory process.”

Based upon these two aspects of tax legislation and administration, Wallace proposes the courts adopt a “‘JCT Canon’ for construing congressional delegations to Treasury.” The proposed JCT Canon calls upon both Treasury and the courts to follow or give extra weight to JCT-produced legislative history as “a good indicator of how members of Congress resolved and understood various issues” and as evidence of “congressional directive” in interpreting the Internal Revenue Code. Wallace contends that reliance upon the JCT Canon would better provide the political accountability that administrative law seeks.

Wallace’s article is tremendously useful for its elaboration of the tax legislative process and its analysis of who participates in commenting on proposed Treasury regulations. And, as suggested above, despite Wallace’s exceptionalist tone, his conclusions may be less exceptionalist than they appear at first blush for several reasons.

Whether tax or nontax, if the meaning of a statute is clear, Chevron step one calls for courts and agencies alike to respect the clearly expressed intent of Congress. Where JCT involvement in tax legislative drafting yields clearer and more specific statutory text, Chevron step one would call for courts to follow that text and, correspondingly, to uphold any Treasury regulations that reiterates it. Additionally, courts sometimes utilize subject matter specific canons—e.g., those favoring veterans or Native Americans—in conjunction with Chevron analysis. Even in its strongest application, Wallace’s JCT Canon would be consistent with that strand of Chevron jurisprudence.

Textualists likely will be skeptical of treating JCT-produced legislative history as completely synonymous with legislative intent, and few judges will embrace a JCT explanation that seems in conflict with statutory text. But all but the most ardent textualists take legislative history into account to some degree in evaluating statutory meaning. A couple of circuits will only consider legislative history in assessing reasonableness at Chevron step two, but most courts will consider legislative history in evaluating statutory clarity at Chevron step one. As Victoria Nourse has argued, one cannot really properly evaluate legislative history without a solid appreciation of how the legislative process actually works. To the extent that the tax legislative process deviates at least somewhat from the norm for other types of legislation, courts ought to be made aware of that deviation.  Wallace’s article serves that function. Again, however, this suggestion seems consistent with a nuanced understanding of Chevron analysis, rather than a deviation from it.

Where the statutory text is less than clear, Chevron step two calls for courts to defer to reasonable agency interpretations thereof. The Supreme Court has never clearly explained exactly what makes an agency’s interpretation reasonable or unreasonable for this purpose. State Farm doctrine requires agencies to contemporaneously document the justifications for their actions. Some courts have invoked State Farm in conjunction with Chevron step two, looking for agencies not only to adopt interpretations that statutory text, history, and purpose can plausibly accommodate but also to explain their reasons for choosing one permissible interpretation over another. Other courts limit Chevron step two to whether statutory text, history, and purpose can plausibly accommodate the agency’s interpretation, and evaluate State Farm’s reasoned decisionmaking requirement as a completely separate issue.

Regardless of whether Chevron step two and State Farm analysis are separated or combined, if JCT-produced legislative history elaborates ambiguous statutory text, and Treasury regulations incorporate that explanation, then unless the legislative history flatly contradicts the statute’s text (and why would it?), courts are likely to look favorably upon consistency between the JCT’s account and the regulations. Correspondingly, if Treasury regulations are inconsistent with the JCT-produced legislative history, then courts are likely to expect Treasury and the IRS to explain and justify the discrepancy in evaluating reasonableness under either Chevron step two or State Farm (and rightly so!). In sum, irrespective of whether they use the JCT Canon label, courts are likely to approach Chevron and State Farm analysis in a manner consistent with Wallace’s JCT Canon.

Lastly, Wallace is absolutely right to be concerned about the quality and scope of public participation in the rulemaking process. Administrative law scholars and specialists across the regulatory spectrum fret about underparticipation by members of the general public in the rulemaking process. They look for ways to facilitate and encourage broader participation. They also contemplate whether and how agency decisionmaking should be influenced by or take into account the breadth and caliber of public participation. Wallace’s empirical analysis adds meaningfully to that discussion.  Even in the context of State Farm analysis, courts have been less inclined to take these issues into account in evaluating agency reasonableness. Perhaps Wallace is correct that they should give such issues more weight in evaluating agency action. Again, however, as Wallace acknowledges, it is far from clear that tax is exceptional in this regard.

Exceptionalism versus anti-exceptionalism aside, Congressional Control of Tax Rulemaking is simply a wonderful addition to the tax administration literature and well worth reading for both tax and nontax scholars alike. Wallace’s article gives me hope that exceptionalists and anti-exceptionalists can find common ground as tax administration continues down the path of greater integration with general administrative law requirements, doctrines, and norms.

Cite as: Kristin Hickman, Bridging Exceptionalism and Anti-Exceptionalism with the JCT Canon, JOTWELL (December 10, 2018) (reviewing Clint Wallace, Congressional Control of Tax Rulemaking, 71 Tax L. Rev. 179 (2017), available at SSRN),

Learning from Our Mistakes

The income tax is a formidable institution in American political life. Understanding the many facets of its current form is a challenge, given the myriad forces that have interacted in its evolution. Larry Zelenak, in his book Figuring Out the Tax, published in January 2018 as part of the Cambridge Tax Law Series, offers the reader substantial insights into these forces through a close examination of the early history of the income tax in the United States.

Zelenak does not attempt to outline the entire history of the income tax, or even its complete history during the two decades following 1913, with which he deals most completely. Zelenak instead has chosen to provide the history of a number of discrete aspects of the income tax: the use of withholding for income streams other than wages, the step-up of basis at death, the use of value rather than basis to define the charitable deduction, the allowance of investment losses, the special treatment afforded families, the omission of imputed rental values enjoyed by homeowners and the surprisingly favorable treatment of earned income. These topics are not intended to be exhaustive or even representative; instead they were chosen because they had not, in Zelenak’s view, been the subject of adequate earlier treatments.

Although he limits the topics he discusses, Zelenak does not limit the influences he examines and the sources through which they reveal themselves. Despite his title, Zelenak does not get bogged down in evaluating the roles of Congress and Treasury in light of modern administrative law, but instead offers many anecdotes that reveal the ever-fluctuating amount of discretion Congress has given to tax bureaucrats.

Zelenak takes his stories not just from traditional committee reports and hearing testimony, but also from newspaper reports, tax advice columns, constituent letters to members of Congress, and personal memoirs. Perhaps aided by the relatively new capacity of online searching to uncover previously obscure sources, he is able to offer his readers many intriguing new anecdotes. Through these fresh sources the reader is shown not just what tax reformers hoped to accomplish, but also the ways in which their efforts were often misinterpreted and sometimes totally derailed.

The result is a wonderful journey down the evolutionary path of the income tax. The stops along the way are often surprising. Those who lived through the timid efforts in the last few decades to buttress compliance through expanded withholding (including on payments made to government contractors) may be surprised to learn that the first income tax act, modeled on the British practice, included withholding on virtually all recurring payments that were likely to be subject to tax. Those who accept as obvious the virtues of an income tax that avoids taxing investment income (since taxing investment income amounts to a “double tax” on savings) may be surprised to learn that the income tax historically often treated income from services more favorably than investment income.

Zelenak’s history assigns several original “mistakes” to those whose labors produced the income tax. These include both the step-up-in-basis at death and the overstated amount of charitable deductions. Zelenak labels these as obvious “mistakes” that should have been recognized as such even as the decisions leading to them were made. In retrospect the cost of these mistakes was as great as Zelenak asserts.

Yet the mistakes may have been more in miscalculating the durability of the positions once they were implemented rather than in failing to understand the internal logic of the income tax. Some of the moves that Zelenak most rues were probably the result of unspoken political compromises that seemed entirely sensible when the income tax was first introduced. Although the record only rarely provides express acknowledgement, the early advocates of the income tax likely had to ensure that the tax they were molding would not produce a backlash bigger than they could control. The backlash could have taken several forms, including a Supreme Court willing to gut the tax even if it did not strike it down completely. For instance, the base they crafted could not too “retroactive” (in the sense that it taxed values that predated the sixteenth amendment’s ratification), lest the tax be vilified and perhaps struck down as a wealth tax rather than an income tax. The base, furthermore, needed to include some escape valves to relieve political pressure, even if the resulting leaks were large.

But by characterizing these positions as “mistakes,” Zelenak confirms his commitment to the ideal of a logical income tax. Thus Zelenak’s is a history that defends the twentieth century income tax, even if he is sometimes unforgiving of the original errors made from its start.

Cite as: Charlotte Crane, Learning from Our Mistakes, JOTWELL (November 13, 2018) (reviewing Lawrence Zelenak, Figuring Out the Tax: Congress, Treasury, and the Design of the Early Modern Income Tax (2018)),

Fleshing Out Centralized Review of Tax Regulations

Clinton Wallace, Centralized Review of Tax Regulations, 71 Alabama L. Rev. __ (forthcoming 2018), available at SSRN.

In a new article, Centralized Review of Tax Regulations, Clinton Wallace addresses the timely question of whether and how tax regulations should be subject to centralized review by the Office of Information and Regulatory Affairs (“OIRA”) in the Office of Management and Budget (“OMB”). While OMB review has become standard for “significant” or “economically significant” agency regulations, tax regulations have long avoided review even when they meet this standard, raising, yet again, the question of whether tax should be different than other areas of administrative law. In addition to helping us understand the historical lack of centralized review of tax regulations, Wallace’s paper does the important job of showing the inadequacy of the new framework for centralized review, and pushing us to recognize the complex questions that have to be answered to develop objective criteria for review.

Wallace first describes how the history of tax regulations not being subject to OIRA review is tied in with the long and much discussed (at least in tax circles) story of tax exceptionalism. Historically, Treasury and the IRS have taken the view that most of their regulations were merely interpretive and thus not subject to various requirements such as notice-and-comment or centralized review. This has resulted in the anomaly of tax regulations not being subject to the various stages of OIRA review even in cases in which other agencies, with joint drafting responsibility, have subjected that very same set of regulations to centralized review. Wallace also describes how the anti-inversion rule, the one tax regulation that has been subject to centralized review recently, was only reviewed in a relatively superficial way, lacking the type of rigorous analysis prescribed by OIRA’s own rules.

What could have just been a historical analysis has become a current event as a result of the Trump administration’s decision to reconsider exemption of tax regulations from centralized review and the passage of the Tax Cuts and Jobs Act (“TCJA”) at the end of 2017. The TCJA was drafted hastily, leaving Treasury and IRS with significant discretion to fill in gaps in the legislation. Whether or not OIRA weighs in on this process is thus poised to be a particularly important question. And the Trump administration has recently created a “new framework” for centralized review of tax regulations. As Wallace adeptly describes, exactly what this new framework means for centralized review of tax regulations is not entirely clear. Namely, the framework’s application of centralized review to “novel or legal policy issues, such as [those that prescribe] a rule of conduct backed by an assessable payment” could, in theory, apply only to a select few Treasury Regulations, or almost any. And the framework’s application of centralized review to rules that “have an annual non-revenue effect on the economy of $100 million or more, measured against a no-action baseline” is particularly inscrutable and could be subject to any number of interpretations. As Wallace points out, the uncertainty around exactly when OIRA review will happen creates the undesirable prospect of lobbying and perceived unfairness.

In light of this concern, Wallace examines the arguments for and against centralized review of tax regulations. On the one hand, centralized review of tax regulations may be an important step in making tax part of a broader, rational government policy of spending and borrowing. It may reduce the possibility of capture, it may increase accountability and transparency into regulatory decisions that can oftentimes involve political decisions, and it may provide Treasury and IRS valuable input and perspective regarding regulations that implicate many non-tax questions. On the other hand, centralized review may increase ossification as well as the perceived and/or actual politicization of the tax system, something that presidential administrations have tried to avoid since, and even before, Nixon’s attempt to use the IRS to target political enemies. Moreover, there is deep uncertainty in tax scholarship about how to deploy some of the tools that one would expect from centralized review, such as cost-benefit analysis that takes into account the behavioral impacts of the regulation. And certain aspects of centralized review that have not been as developed because they have not been as relevant in other areas, including distributional analysis, seem key to tax analysis, necessitating some rethinking of what, exactly, centralized review entails.

In order to provide some guide through this maze of potential approaches to centralized review, Wallace suggests that tax regulations can have different functions: private allocation (incentive provisions), public allocation (revenue raising provisions), and implementation (interpretive rules that involve the exercise of very little discretion by Treasury). While Wallace acknowledges that tax regulations can often serve a combination of these functions, he nonetheless argues that certain types of centralized review can make more sense for some functions. For instance, he argues that robust inter-agency cost-effectiveness analysis would be beneficial for private incentives, Treasury and IRS-driven revenue estimates and distributional analysis would be beneficial for public allocation, and no centralized review should apply to mere Treasury and IRS implementation of congressional mandates.

Wallace recognizes some of the difficulties in distinguishing between these different functions and, in the end of the paper, turns to trying to improve the existing Trump administration framework thresholds for review. The distinctions Wallace tries to draw pose difficult line-drawing problems that present promising questions for further research. The perennial difficulty in distinguishing between legislative and interpretive rules, for instance, suggests that trying to distinguish between what he calls the implementation function and the other functions would be an incredibly difficult task. Wallace’s contribution is to identify and explore the challenge posed by tax regulations doing all sorts of things, many of which have little relation to raising revenue.

Cite as: Leigh Osofsky, Fleshing Out Centralized Review of Tax Regulations, JOTWELL (October 11, 2018) (reviewing Clinton Wallace, Centralized Review of Tax Regulations, 71 Alabama L. Rev. __ (forthcoming 2018), available at SSRN),

How Inevitable Is Corporate Tax Competition?

Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman, The Missing Profits of NationsNBER Working Paper 24701 (2018).

How much profit-shifting, from high-tax to low-tax countries, do multinational companies (MNCs) engage in? The question is hard to answer, for both theoretical and empirical reasons. The “true” geographical source of profits earned by MNCs on their global production and sales activities would often be theoretically ambiguous even if their actions and decisions were completely transparent. In addition, however, not only is there a large gulf between what they know and what we (or the tax authorities) know, but relevant economic data may either be unavailable or reflect formalistic reporting conventions.

A recent literature review by Dhammika Dharmapala reports that, in the “more recent empirical literature, which uses new and richer sources of data, the estimated magnitude of [profit-shifting] is typically much smaller than that found in earlier studies.”1 James R. Hines goes further, asserting that profit-shifting is “notably small in magnitude,” and that any public (or even scholarly) impressions to the contrary merely reflect journalistically-driven over-excitement in response to a few “distasteful anecdotes of crass tax avoidance.”2

But what if such conclusions—which are not, however, universal3 —reflect data limitations? An important new National Bureau of Research Working Paper by Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman (“Zucman et al”) makes novel use of macroeconomic data, comparing the wages and profits of MNCs’ foreign affiliates to those of local companies, both in tax havens and high-tax countries, to reach very different conclusions. Zucman et al find that forty percent of MNC profits are shifted to low-tax countries in a typical year, and that this estimate is conservative given the likely impact of statistical gaps. (P. 26.)

I look forward to following, without fixed preconceptions, the debate between and among trained empirical economists regarding what one might loosely call the “Hines versus Zucman” question. In the interim, however, I must confess that Zucman et al’s findings strike me as more plausible given my own, admittedly anecdotal, sense of what is actually happening out there in the field. But let us just suppose (without definitely asserting) here that Zucman et al have mainly gotten it right. What are the main consequences for corporate and international tax policymaking?

Paul Krugman argued, in a recent New York Times op-ed column, that the Zucman et al paper helps to show why the 2017 U.S. corporate tax rate cut, from 35 to 21 percent, is unlikely to yield the promised surge in U.S. capital investment and wages. “[T]he vision of a global market in which real capital moves a lot in response to tax rates is all wrong; most of what we see in response to tax rate differences is profit-shifting, not real investment. [So] there is no reason to believe that the kind of tax cut America just enacted will achieve much besides starving the government of revenue.”4

While this seems clearly right (again, conditioned on the contested empirics), a further question is what countries that object to profit-shifting can unilaterally do about it. Zucman et al argue that the relative immobility (to date) of actual capital employed in productive processes suggests that plunging corporate tax revenues (and statutory rates, in response to observed revenue trends) reflect a wholly avoidable policy failure in high-tax countries. These countries could have maintained high corporate tax revenues and statutory rates, the authors assert, simply by auditing MNCs more aggressively. This has not happened, however, due to incentive problems pertaining to the tax authorities that enforce national tax laws.

More specifically, Zucman et al argue that “tax authorities have incentives to relocate profits booked in other high-tax countries—not profits shifted to havens. Take the case of France. €1 relocated to France is worth the same to France whether it comes from Germany or from Bermuda. But it is easier for the French tax authority to relocate €1 booked in Germany, for three reasons.” (P. 22.) These are (1) feasibility, since far better public information is available to them regarding profits booked in other high-tax countries than in tax havens, (2) likelihood of success, since MNCs don’t particularly care which high-tax country succeeds in claiming a given €1 of profit, and hence will not vigorously resist an auditor’s adverse findings, and (3) speed of settlement, since high-tax countries tend to act quickly in resolving tax base disputes between themselves. (Pp. 22-23.)

This argument evidently has more application to tax auditors than to legislators. Are Zucman et al therefore arguing that tax legislators have merely been inattentive and over-trusting of the tax agency personnel whom they have charged with executing the laws that they enact? One should keep in mind that legislators as well may not especially care whether or not incremental revenue comes at the expense of peer countries. In addition, the legislators may dislike angering MNCs that have political or financial clout, even apart from the question of how taxpayer resistance affects the prospects of audit success. But then we are reaching issues of tax competition and domestic political choice that might be harder to overcome than mere “policy failure[s]” (P. 4) in the realm of administrative oversight.

A further question goes to how MNCs would respond to tougher anti-tax haven, anti-profit-shifting efforts by high-tax countries. Zucman et al’s finding that “[m]achines don’t move to low-tax places; paper profits do” (P. 1) presumably reflects the current ease of shifting just the latter. Cracking down on profit-shifting would increase MNCs’ incentives to consider increasing their real responses to high statutory tax rates.

Despite any such quibbles, Zucman et al have done extremely important work that merits all of the attention it will surely receive. We should all closely follow the ensuing empirical debate, given how dramatically it can affect both our theoretical understanding of MNC behavior and real world policy choices that might dramatically affect rising high-end inequality.

  1. Dhammika Dharmapala, What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature, Coase-Sandor Inst. for L. & Econ. Working Paper No. 702, abstract (2014).
  2. James R. Hines, How Serious is the Problem of Base Erosion and Profit-Shifting?, 62 Can. Tax J. 443, 453 (2014).
  3. See Kimberly A. Clausing, The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond, 69 Nat’l Tax J. 905-934 (2016) (finding higher levels of profit-shifting, and citing earlier literature that is in accord).
  4. Paul Krugman, Tax Cuts and Leprechauns, N.Y. Times, (June 15, 2018).
Cite as: Daniel Shaviro, How Inevitable Is Corporate Tax Competition?, JOTWELL (September 12, 2018) (reviewing Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman, The Missing Profits of Nations, NBER Working Paper 24701 (2018)),

A Challenge to Optimal Tax Orthodoxy

Zachary Liscow, Is Efficiency Biased?, __ U. of Chi. L. Rev. __ (forthcoming), available at SSRN.

In “Is Efficiency Biased?,” Zachary Liscow explores the canonic optimal tax claim—sometimes known as the “double distortion premise”—that non-tax rules should be structured efficiently, without regard to distributional consequences, and that tax and transfer rules should then be used to offset any resulting negative distributional consequences and make such further distributional adjustments as are necessary to maximize aggregate social welfare. This standard claim assumes that “if the tax system achieves the appropriate distribution of income, then the distributive impacts of non-tax policies do not matter.” Ultimately, claim proponents conclude, “everyone can be made better off through efficient non-tax policies, plus taxes and transfers.” The foregoing paraphrases are Liscow’s; for a defense of the claim itself, see Louis Kaplow & Steven Shavell, Should Legal Rules Favor the Poor? Clarifying the Role of Legal Rules and the Income Tax in Redistributing Income and Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income.

Liscow asks the reader to consider a different possibility: that for a variety of reasons the tax system may not actually achieve an optimal distribution of income. If so, Liscow notes, then policies consistent with the double distortion premise will not maximize aggregate social welfare—indeed, they may produce markedly suboptimal results. Part of the problem, he observes, is that efficient non-tax policies are not generally “legal entitlement neutral”—that is, equally likely to favor rich and poor. This follows from the fact that Kaldor-Hicks efficiency “measures the willingness to pay of the parties affected by a policy and then chooses the policy that maximizes the sum of the willingness to pay of those parties” and that the wealthy tend to be willing to pay more for public goods and other legal entitlements.

Liscow notes that many efficient non-tax policies are instead “rich-biased”: “[A]nalysts can measure how willingness to pay changes with income. The answer to that question determines characterization: for rich-biased rules, willingness to pay increases as income increases; for neutral rules, willingness to pay stays the same; for poor-biased rules, willingness to pay decreases at higher incomes.” Examples of rich-biased public goods come easily to mind: cleaner air, more and nicer public parks, roads in better repair, better schools, more effective policing, shorter lines in voting booths. Importantly, the efficiency criterion requires that non-tax policies for which the rich are willing to pay more be rich-biased regardless of whether the rich are actually required to pay for them. Policies that take from the poor and give to the rich may well be Kaldor-Hicks efficient.

Liscow concludes: “[E]conomic analysis of law has long been guided by the assumption that the distributive consequences of policies do not matter, since taxes should respond to take care of distributive considerations. But there is little evidence that taxes in fact do respond….E]fficient policies systematically tend to distribute legal entitlements to the rich, exacerbating income inequalities and possibly leading to multiplication over time. At a time of rising income inequalities and growing concern with these inequalities,…it is time to consider adopting policies that reduce efficiency but have fairer distributional outcomes, at least in some circumstances….[T]his article suggests the importance of considering context in deciding whether to deviate from the efficient rule….For efficient rich-biased rules with distributional consequences that are sticky [e.g., not offset by taxes or transfers],…policymakers should adopt explicitly inefficient rules that treat the rich and the poor alike.”

The most important implications of Liscow’s argument, as suggested by the paper’s own conclusion, might appear to relate primarily to non-tax law, not to tax policy. But the paper carries important implications for tax policy as well.

First, the claim in question—that non-tax policies should be structured efficiently, without regard to distributional consequences, and that tax should then be used to offset any negative distributional consequences and make such further distributional adjustments as are necessary to maximize aggregate social welfare—is a central pillar of optimal tax theory. If, as Liscow argues, efficient non-tax rules are predominantly rich-biased, then the distributional burden the claim asks our tax system to carry may be an impossible one.

Second, in response to our tax system’s continuing apparent failure to meet the distributional challenge, some tax policy scholars, notably Ed Kleinbard, have urged that redistributive efforts focus on fiscal policy—on spending programs—rather than on making taxation itself more progressive. But spending programs are often “non-tax policies” within Liscow’s taxonomy, and are subject to the same rich-bias problems that tort and other more obviously “non-tax” rules present. Liscow himself notes, for example, that decisions on transportation spending have been rich-biased, even under Democratic administrations, because of the use of conventional cost-benefit analysis, which assigns less value to the lives, health, and time of poor Americans than to those of the rich.

Third, conventional tax theory supports the use of Pigouvian taxation to correct externalities—costs imposed on someone other than the actor. In measuring those costs, however, it uses willingness to pay as its metric. Pigouvian analysis thereby itself becomes rich-biased. As Liscow points out, under Kaldor-Hicks, higher levels of carbon taxation or other ameliorative measures are warranted to prevent the negative health consequences of air pollution to the rich than are warranted to prevent identical negative health consequences to the poor.

Finally, and perhaps most importantly, the paper raises questions about the way optimal tax theory measures the size of behavioral distortion and dead-weight loss: it does so by looking at willingness to pay—the core methodological decision that leads Kaldor-Hicks analysis itself to produce rich-biased results. Thus, because the poor are less willing to pay for leisure (because they have to eat), Ramsey tells us that we should tax the poor, not the rich, so as to avoid behavioral distortion and with it deadweight loss. Harberger tells us that taxes on suppliers or consumers with particularly elastic supply or demand curves (read “the rich”) produce larger deadweight loss than taxes on suppliers or consumers whose curves are inelastic (read “the poor”). Here, I do not blame either Ramsey or Harberger; they were writing without the benefit of Liscow’s insight. But Liscow’s insight requires that we rethink their conclusions—not perhaps to abandon them, but to develop a clearer consensus about when those conclusions ought or ought not to affect our decisions.

Cite as: Theodore P. Seto, A Challenge to Optimal Tax Orthodoxy, JOTWELL (July 30, 2018) (reviewing Zachary Liscow, Is Efficiency Biased?, __ U. of Chi. L. Rev. __ (forthcoming), available at SSRN),

The Ability-to-Pay Principle and the Counterintuitive Distributive Justice Analysis of Alimony Payments

Alice Abreu, Tax 2018: Requiem for Ability to Pay, 52 Loyola L.A. L. Rev. (forthcoming 2018), available at SSRN.

The tax bill that Republicans in Congress passed, and that Donald Trump signed in December 2017, might end up being one of the shortest-lived tax laws in U.S. history. Not only are large elements of it explicitly temporary, but the political moment that led to its passage seems already to be passing, quite likely to be followed by a time when progressive tax policy will once again be politically viable.

However, even if this bill lapses or is repealed (in whole or in part), Alice Abreu provides an important contribution to our understanding of what just happened in Tax 2018: Requiem for Ability to Pay. The title of the article telegraphs the importance of the issue that she identifies as the most unfortunate aspect of the new tax law. Whereas objective analysts knew that the bill’s changes would make the tax system less progressive than it had been, Abreu explains that seemingly unrelated elements of the bill add up to a repudiation of the very idea of progressive taxation.

On the surface, that might seem to be an extreme claim. After all, the individual tax brackets maintain a structure of marginal tax rates that rise progressively from 10 percent to 37 percent, barely different from the structure that existed before. Abreu’s article, however, describes how the rules have changed in a way that breaks the connection between ability-to-pay and the taxable income to which those progressive rates apply.

On a theoretical level, Abreu explains how the canonical separation of distributional analysis into questions of horizontal and vertical equity is highly artificial. In essence, she shows that people who are horizontally dissimilar are now being treated as if they are similar. For example, by giving everyone the same standard deduction without taking account of family size, two taxpayers can pay the same tax bill because their taxable incomes are identical, even though their true abilities to pay are not at all the same. A taxpayer who is truly richer than another person in the economic sense receives preferential tax treatment, because we are ignoring what makes him richer.

The article includes important discussions about several violations of the ability-to-pay principle, including the new law’s change to the zero bracket that will cause some people in poverty to pay more taxes, the creation of artificial distinctions in the tax rates faced by various types of labor income, and the rejection of capital export neutrality. In this short review, however, I will focus only on Abreu’s analysis of the surprising effects of the repeal of the deduction for alimony and the concomitant repeal of the inclusion of alimony in the gross income of the recipient ex-spouse, and I will add a further consideration into the analysis.

Abreu explains her concern about how those two changes regarding alimony will result in inappropriately equal tax treatment of dissimilar taxpayers:

“[T]axpayers with wildly disparate ability to pay as measured by economic income will seem to have equivalent ability to pay, as measured by taxable income. This will occur because the receipt of the alimony that increases ability to pay will be ignored in the determination of the tax base. For example, an individual who receives $40,000 of alimony in addition to $40,000 of wages will look to the tax system precisely like one who receives only $40,000 of wages, even though the first individual has $80,000 of economic income and therefore has twice the ability to pay of the first.” (P. 3.)

In one sense, however, this move could be seen as a pro-feminist adjustment to the tax code (even though it would be difficult to imagine that the current congressional majority was looking to use the tax system to fight the patriarchy). After all, because of the realities of wealth and income maldistribution in the U.S., the typical alimony payment is received by a woman in a lower tax bracket and paid by a man in a higher tax bracket. Taking the deduction away from (mostly) men and allowing (mostly) women to exclude alimony from gross income could partially make up for the income inequality that led to the alimony arrangement in the first place.

For example, suppose that the ex-husband who is paying $40,000 per year in alimony was in the top tax bracket (which, under the pre-2018 code, was 39.6 percent of income in excess of $418,400). His tax liability would thus have been reduced by almost $16,000 per year (nearly 40 percent of $40,000). His ex-wife, meanwhile, included $40,000 in alimony payments in her gross income. In Abreu’s example above, the payee also earns $40,000 in labor income, for a gross income of $80,000. The entire $40,000 of added gross income from alimony would have been subject to a marginal rate of 28 percent under the old system, for a total increased tax liability of $11,200.

Under the new rule, by contrast, a $40,000 alimony payment actually costs the payor spouse $40,000, rather than the $24,000 net amount after taking account of the value of the deduction. The payee, similarly, nets the entire $40,000 rather than $28,800, which is what she would have had after paying the $11,200 in taxes under the old rule. This, therefore, would appear to result in a net transfer of $11,200 from the payor spouse to the payee spouse—plus the added bonus of $4800 net transferred from the payor spouse to the Treasury (which is surely why the law’s congressional sponsors included these new rules in a bill that needed revenue offsets).

This, however, assumes that divorcing couples will continue to make the same deals under the new rules that they would have made under the old, which is exceedingly unlikely. The more likely result is that the payor spouse—who is, almost by definition, the party to the divorce with greater bargaining power—will insist on paying as close to $24,000 as possible. “I was willing to end up $24,000 down after tax from paying alimony, and that’s as far as I’ll go.” If the divorce settlement lands on that end of the spectrum, the payee spouse will lose compared to the old system ($24,000 net after taxes instead of $28,800), even though she does not have to pay taxes on her alimony income.

The point here is that a change that looks like it favors one party over another might not do so. This in turn clears the decks to allow us to appreciate Abreu’s focus on ability to pay: a person who receives $80,000 in income should be treated as if they have $80,000 in income, not $40,000; and a person who receives, say, $540,000 in income but is legally required to transfer $40,000 to another person should be treated as a person who has $500,000 in income. It is certainly true that those incomes should be taxed at different rates, but the incomes must be measured correctly in the first place.

I encourage readers to engage with the other arguments in Abreu’s admirably parsimonious (17 page) article. Without any real debate, our tax system has been transformed from one that at least aimed to impose equal tax rates on people with equal ability to pay into a system that makes a mockery of that notion of distributive justice by deliberately mismeasuring people’s true incomes. Abreu makes us aware of what has just happened in the name of the American people.

Cite as: Neil H. Buchanan, The Ability-to-Pay Principle and the Counterintuitive Distributive Justice Analysis of Alimony Payments, JOTWELL (July 2, 2018) (reviewing Alice Abreu, Tax 2018: Requiem for Ability to Pay, 52 Loyola L.A. L. Rev. (forthcoming 2018), available at SSRN),