The Journal of Things We Like (Lots)
Select Page

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),

Rules vs. Standards

Sarah Lawsky, A Logic for Statutes (Fla. Tax Rev., forthcoming), available at SSRN.

Professor Sarah Lawsky (Northwestern) has written a fascinating and thought-provoking essay on the logic of statutory interpretation—specifically as it applies to the Internal Revenue Code. Notwithstanding a long tradition of scholarship addressing the interpretation of legislative texts in general, careful attention to interpretation of the Code has received comparatively little attention. An important reason for this, as we have argued in previously published articles, has been the tendency to frame Code provisions as rules and to apply them deductively to the facts of particular cases. Such a practice pushes in the direction of a more-or-less mechanical interpretation of the Code, which in turn makes questions regarding statutory interpretation seem fairly uninteresting. Professor Lawsky’s essay engages directly and critically with this practice.

Professor Lawsky argues that while the application of statutes involves “rule-based reasoning,” it is “not best understood as merely deductive.” Rather, the proper logical model for understanding statutory reasoning is what Professor Lawsky calls “default logic.” She argues that application of the Internal Revenue Code does not proceed as the direct, deductive application of an individual statutory provision to a set of facts; rather, the structure of the Code comprises two different orders of rules: (1) “default rules” (if-then rules) and (2) priority rules (rules that establish the “relationship between” and the “relative priority of” the default rules). As an example, Professor Lawsky applies this more complex rule structure to Section 163(h) of the Code (which permits a deduction for home mortgage interest), and argues that default logic “more accurately reflects rule-based legal reasoning as actually practiced by lawyers, judges, and legislative drafters.”

What has prompted us to comment on Professor Lawsky’s forthcoming article is its conception of statutes, generally, and tax statutes, particularly, as rules. Professor Lawsky understands her project of developing a “logic for statutes” as explicating “rule-based reasoning,” and her proposed model for statutory reasoning is one that applies multiple orders of rules. But as we have claimed in our own work, a complex statute, including the Internal Revenue Code, cannot be reduced to rules.1

To see where Professor Lawsky’s approach differs from ours, consider that her analysis explicitly “examines the structure of rule-based reasoning after ambiguities [in the statutory rule] are resolved and the meaning of the rule’s terms established.” As we see it, to by-pass engagement with the ambiguities of a statutory text is to neglect the very issues that form the core of statutory interpretation. As Karl Llewellyn, whom Professor Lawsky appropriately cites, famously argued, a statutory text is intrinsically susceptible to different constructions, and applying the text requires choices among those different constructions. These choices, we have argued, require taking into account a variety of often competing values. In the context of interpreting the Code, they include tax values, values having to do with the significance of statutes, and broader social values. And it is precisely because these values are multiple and heterogeneous that statutory provisions appear “ambiguous.” In short, ambiguities in statutes cannot be “resolved,” much less assumed away, without making decisions about which values will be advanced. Indeed, this swirl of relevant values renders the very rules on which Professor Lawsky’s approach depends—the default rules and the priority rules—ambiguous; that is, determination of just what the default and priority rules are requires the choices Llewellyn pointed to.

Moreover, when we sort through the complex of values relevant to interpreting tax statutes, it turns out that many provisions in the Internal Revenue Code are best interpreted not as rules at all, but as standards. As we have argued, for example, determining whether catching a record-breaking homerun baseball or receiving a haircut from one’s spouse constitutes “gross income” under section 61(a) of the Code requires that all relevant facts and circumstances be taken into account. That is, the definition of income is a standard, and the application of standards cannot be subsumed within Professor Lawson’s model of default and priority rules. That model simply will not tell us whether this or that accession to wealth counts as gross income under the Code.

Interpreting section 61(a) as a standard enables judgments about what is and is not income. However, those judgments (like all judgments involving the application of standards) are necessarily contestable and provisional, turning on debate over what facts and circumstances are relevant—the opposite of conclusions arrived at through deductive reasoning. In this sense we agree with Professor Lawsky about the inadequacy of a simple deductive model of statutory reasoning. Where we differ is in the reason for the inadequacy. Professor Lawsky believes that statutory reasoning requires complexifying the deductive model by adding priority rules to resolve conflicts among the default rules. We believe that what appear to be conflicts among statutory rules are often better understood as the indeterminacy that occurs when standards are applied to new facts and circumstances.

Our particular disagreements notwithstanding, Professor Lawsky’s analysis of statutory reasoning in the context of tax law is an important contribution to this undertheorized concern for practitioners and scholars. From our different perspectives we share the objective of showing that the application of the Internal Revenue Code is a more complex enterprise than has been traditionally thought. Her objection that statutory interpretation is “taken as simple in legal scholarship” seems to us a correct worry, especially when applied to tax analysis. Professor Lawsky’s essay vigorously engages with that mistaken view, and in so doing, pushes forward the development of this critical issue in tax jurisprudence.

  1. See Alice G. Abreu & Richard K. Greenstein, The Rule of Law as a Law of Standards: Interpreting the Internal Revenue Code, 64 Duke L.J. Online 53 (2015); Alice G. Abreu & Richard K. Greenstein, It’s Not a Rule: A Better Way to Understand the Definition of Income, 13 Fla. Tax Rev. 101 (2012); Alice G. Abreu & Richard K. Greenstein, Defining Income, 11 Fla. Tax Rev. 295 (2011).
Cite as: Alice Abreu & Richard Greenstein, Rules vs. Standards, JOTWELL (June 7, 2018) (reviewing Sarah Lawsky, A Logic for Statutes (Fla. Tax Rev., forthcoming), available at SSRN),

Understanding Tax Provisions in M&A Agreements

Gladriel Shobe, Private Benefits in Public Offerings: Tax Receivable Agreements in IPOs, Vand. L. Rev. (forthcoming 2018), available at SSRN.

In Private Benefits in Public Offerings, Prof. Shobe describes the emergence and evolution of a fascinating term in initial public offerings: tax receivable agreements (TRAs). These agreements reserve for the pre-IPO owners of the business the economic value of certain tax attributes that are either created in the course of the IPO or which were created over a course of years before the IPO. TRAs are contracts between the post-IPO corporation and the pre-IPO owners, pursuant to which the corporation makes distributions to those pre-IPO owners as tax assets are used. In one variation, pre-IPO owners receive the economic benefit of basis step ups that arise in certain “turbocharged” IPOs, and in other variations the pre-IPO owners receive the economic benefit of net operating losses and historical basis in the corporation’s assets.

Shobe then goes on to evaluate the fairness of these agreements. One view that motivates her discussion is that tax assets are underpriced in IPOs, and that TRAs are one way of ensuring that the pre-IPO owners receive a “fair price” for these assets. The opposing view is that the tax assets are properly valued in IPOs already, so that the TRAs allow pre-IPO owners to extract a greater purchase price from new investors than they otherwise would, and perhaps should.

One important contribution of the paper is to describe how these agreements work, and to document how they have both proliferated and mutated into different forms. Shobe teaches the reader a great deal about this feature of IPOs and make some important observations about how they operate. Her work raises the question of why certain variants of the TRA were adopted in some IPOs and other variants were adopted in others, and why TRAs that convey the benefits of net operating losses and historical basis have become increasingly popular over time. Exploring the relationship between the form of the TRA and other characteristics of the IPO might help explain what function they serve.

The paper’s normative discussion focuses almost exclusively on the question of whether such agreements are fair, because the pre-IPO owners are being compensated for a valuable tax asset, or unfair because new investors are unaware of the liability that the corporation is assuming when they set the purchase price. One might also think more broadly about why such an agreement might exist, beyond simply extracting value from unwitting purchasers. Thinking carefully about how tax assets differ from other assets points in some interesting directions.

For example, the value of net operating losses (NOLs) depends on the IPO corporation’s taxable income. Pre-IPO owners that reserve for themselves payments contingent on the use of those NOLs are sending a signal to potential investors about their expectations about the profitability of the company. Those same pre-IPO owners might be thought to have better information about the corporation’s prospects, so that the signal allows them to extract a higher price in the IPO. The same rationale would not apply with the same force to TRAs in which the pre-IPO owners reserve for themselves the benefits of historical basis in non-depreciable assets, since the benefits of the basis are contingent on the future value of those assets (and whether they are ever sold) and do not depend only on the income of the corporation generally. This suggests that empirical testing of the signaling hypothesis might be of value. Shobe notes that private deals often require purchasers to pay sellers for the value of tax assets but also require sellers to pay buyers for undisclosed tax liabilities. She suggests that the fact that TRAs in public deals only incorporate one half of this bargain might be unfair. Perhaps. But there might be are other differences between public and private deals they could justify the use of TRAs to resolve information asymmetries in expected future income, but not to address tax liabilities, which arose in the past and are subject to due diligence.

More generally, there is a fascinating puzzle about what work TRAs are doing. Shobe lays the descriptive groundwork and takes a first step in assessing the merits, and I hope that this paper also sparks additional work by contract law and corporate law scholars exploring the reasons for these provisions.

Cite as: Andrew Hayashi, Understanding Tax Provisions in M&A Agreements, JOTWELL (May 9, 2018) (reviewing Gladriel Shobe, Private Benefits in Public Offerings: Tax Receivable Agreements in IPOs, Vand. L. Rev. (forthcoming 2018), available at SSRN),

Canadians Can Be Unruly, See For Yourself

Some of my favourite tax scholarship steps outside technical detail and speaks to how tax systems promote or are informed by higher-order values. So, I welcome Shirley Tillotson’s magnificent and richly researched new book on the era between the enactment of Canada’s federal income tax law in 1917 and its heady 1960s reform period, which saw taxpayer-citizens actively debating the contours of democracy through the vehicle of tax reform. At its heart, the book is about what we can learn about democracy from our engagement with taxation and how our democracy can be enhanced when we find ourselves talking about taxes over coffee.

A historian could learn a lot about tax history from reading iterative drafts of legislation, department of finance notes, house of commons debates, and parliamentary committee reports: indeed, some have. Tillotson doesn’t take those as her starting place. Instead, she is interested in how “real people” engage with the tax system and its reform. For her book, she culled through thousands of letters between taxpayers and tax authorities. The letters were mined from the records of the Department of Finance and the Department of National Revenue, in the papers of prime ministers, finance ministers, opposition leaders, and tax officials.

She displaces the myth that tax rage or revolt are new phenomenon. Her work documents a range of complaints about the tax system and proposed reforms over 50 years; yet, there was change in that period. No one could contest that what started as a perhaps more modest (and elite-focused) project had become a mass tax. Perhaps her work offers us hope that in the face of resistance and complaint there is the potential for dialogue, adjustment, compromise, and ultimately, transformation.

Tillotson is a beautiful writer, and often funny, a pleasant surprise. And so, her work is worth reading in its entirety for pleasure alone. Nevertheless, as a teaser for a largely American Jotwell readership, she also draws out some of the American tax story. For example, before the Second World War, Canada relied more heavily on regressive taxes than the United States, and was appealing to wealthy Americans seeking to reduce their government contributions. Although Americans adopted a marital income splitting approach to tax unit, Canada resisted (despite some strong advocacy to follow suit). Canada has lacked the constitutional-style tax resisters often found in the US, although Tillotson’s book certainly documents the stroppiness of the Canadian public when it comes to tax policy and tax reform. Hence the unruly title of this Jot.

Let me end with a brief aside. One of the things I appreciate in the work of others is their willingness to engage with scholarly colleagues and to acknowledge the contributions of others. Tillotson has worked closely over the years with a Canadian colleague, Elsbeth Heaman. (Heaman also published a tax history book in 2017 – Tax, Order, and Good Government: A New Political History of Canada, 1867 – 1917 (2017). Tillotson gracefully and regularly acknowledges — both in this work, but also in her interviews and media work on it — the joy and value of having had a thoughtful collaborator in the pursuit of Canadian tax history.

Tillotson’s book is a fine contribution to tax and social history. If you are an American wondering how tax dialogue works in the big piece of land to the North, it’s well worth your time.

Cite as: Kim Brooks, Canadians Can Be Unruly, See For Yourself, JOTWELL (April 10, 2018) (reviewing Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (2017)),

What Do Audits Teach Us About Tax Compliance?

For those interested in understanding taxpayer compliance—including what motivates taxpayers to report honestly and how to reduce tax evasion – there is a robust body of empirical and legal literature. A number of economists and lawyers have examined the effect of traditional deterrence mechanisms like audits and penalties, as well as non-economic factors like social norms, guilt, taxpayer attitudes about how their tax money is spent, and other psychological factors. While this growing body of literature provides a rich description of the myriad of factors that influence tax compliance decisions, our understanding of taxpayer behavior is far from complete, and further study continues to be necessary. In expanding our understanding of taxpayer motivations, one revealing but possibly overlooked resource is the IRS Taxpayer Advocate Service (“TAS”), which each year publishes a number of empirical studies and other reports relevant to tax compliance. The authors of TAS studies are uniquely situated in that they have access to IRS tax return data, which should provide the best evidence of how taxpayers make decisions in the real world.

As part of the Taxpayer Advocate’s most recent Annual Report to Congress, the TAS published Audits, Identity Theft Investigations, and Taxpayer Attitudes: Evidence from a National Survey (the “Report”). The Report surveyed 2,729 Schedule C filers, that is, taxpayers reporting income from self-employment. Of this group, roughly half (1,363) had been previously audited and half (1,366) had not. One of the primary goals of the Report was to examine how audits influence taxpayer attitudes and behavior. While several of the findings are predictable and consistent with other research on audits, three of the Report’s findings are quite surprising.

The first and most surprising finding is that nearly 40 percent of the audited taxpayers surveyed did not know they had been audited. You read that right. When audited taxpayers were asked if they had been audited in the past, a significant number of them (38.7 percent) did not appear to realize they had been. Why? The answer is at least partly in the details. Taxpayers who experienced a “correspondence audit” (in the form of letters from the IRS) were far more likely to not realize they were being audited compared to those who experienced an in-person audit. It’s plausible that taxpayers envision audits as involving an IRS agent digging through their files, and that they simply do not perceive an exchange of letters as an audit. But since more than 70 percent of audits are done through correspondence, perhaps audits don’t have as strong of a deterrent effect as we might assume.

The second surprising finding is that audited taxpayers have more favorable views about justice in the tax system than non-audited taxpayers. Specifically, audited taxpayers perceive higher levels of procedural justice, informational justice, interpersonal justice, and distributive justice as compared to unaudited taxpayers, perhaps indicating that their experience with the IRS was “transparent, respectful, and appropriate” according to the Report. On the one hand, this may indicate that the IRS gets a bad rap: we might assume an audit will be an invasive and stressful experience when, in actuality, perhaps it’s not so bad. On the other hand, less than half of taxpayers surveyed owed the IRS money after their audit, and nearly 19 percent were owed a refund. This happy and perhaps unexpected outcome likely influenced the attitudes of some survey respondents.

The third surprising finding is that taxpayers who receive a refund after an audit have less favorable views about the tax system than those who receive no adjustment after an audit. In fact, taxpayers with no change after an audit reported the highest perceived levels of distributive justice in the tax system and most positive attitudes overall as compared to taxpayers who owed money and those who were owed a refund. Interestingly, this indicates that post-audit refunds don’t necessarily promote positive attitudes towards the IRS and the tax system. Perhaps the explanation here is that an audit with no adjustment indicates that everything was working correctly: the taxpayer got it right on her return and IRS inquiry did not change the result. On the other hand, it is somewhat surprising that taxpayers who got their returns right the first time aren’t more resentful that they were audited at all, especially as compared to those who receive a surprise refund.

Other aspects of the Report were not surprising. Self-employed taxpayers tend to consider cheating more than employed taxpayers, which makes sense because the former group has significantly more opportunity to cheat. It is also unsurprising that taxpayers who owed money after an audit report more negative attitudes about the tax system compared to those who weren’t audited, including lower levels trust in the IRS and higher levels of anger.

Overall, there are a number of possible takeaways from the Report. Audits appear to have a deterrent effect, but we may overestimate their power given the number of taxpayers who don’t realize they have been audited. At the very least, we can’t necessarily analyze the impact of audits collectively, as the type of audit (correspondence versus in-person) matters a great deal. Furthermore, the IRS’s bad reputation—at least when it comes to audits—might be undeserved, given the positive attitudes reported by many audited taxpayers. More generally, the Report highlights the fact that taxpayer attitudes about the tax system are heterogeneous and complex, underscoring the importance of continued study. Finally, the Report illustrates the wealth of information on tax compliance that is available thanks to TAS.

Cite as: Kathleen DeLaney Thomas, What Do Audits Teach Us About Tax Compliance?, JOTWELL (March 1, 2018) (reviewing Taxpayer Advocate Service Research Report, Audits, Identity Theft Investigations, and Taxpayer Attitudes: Evidence from a National Survey (2017)),

What We Now Know We Didn’t Know about Tax Evasion (and Why it Matters)

Annette Alstadsæter, Niels Johannesen & Gabriel Zucman, Tax Evasion and Inequality, NBER Working Paper No. 23772 (2017).

Over the past several years, a series of leaks related to offshore tax avoidance and evasion (SwissLeaks, LuxLeaks, the Panama Papers, Bahama Leaks, and Paradise Papers, to name a few) has fueled calls for tax transparency. To date, most discussion of the leaks has been policy-oriented (leaks: good or bad?) and largely anecdotal (based on some truly outrageous revelations). It was not until very recently, however, that a small group of researches started delving into the data exposed by these leaks to make statistically significant empirical findings. Alstadsæter, Johannesen & Zucman’s (AJZ) paper is an excellent example of such paper, which combines methodological sophistication, public data, and leaked data, to make important new contributions to the voluminous literature on the offshore tax world.

Matching leaked data with data from random audits in Scandinavian countries, public wealth records in those countries, and data from voluntary disclosure programs, AJZ find that offshore tax evasion (meaning, the act concealing income from tax authorities in offshore accounts), is not evenly distributed across wealth groups. Rather, they demonstrate that “the probability to hide assets offshore rises sharply with wealth, including within the very top groups of the wealth.”

AJZ findings stand in sharp contrast to what is known (or at least assumed) about tax evasion from stratified random audits, which—per AJZ— is “the key source used so far in rich countries” to study tax evasion. AJZ argue that random audits miss large part of tax evasion, “because it assumes that detected and undetected forms of tax evasion are similarly distributed across the income spectrum”. They suggest, however, that “sophisticated forms of evasion involving legal and financial intermediaries—that are only accessible to wealthy taxpayers—are unlikely to be uncovered in random audits.”

AJZ find, however, that “[Scandinavian] households who own around $10-12 million in net wealth are twice more likely to conceal assets abroad than households with around $5-6 million; households with more than $45 million are four times more likely.” Consider another example: random audits suggest that the average evasion rate in Scandinavian countries is 3% (meaning, about 3% of all individual taxes are evaded in Scandinavia). AJZ find, however, that the top 0.01% of Scandinavian households (in terms of net wealth) evade about 25% of their income through offshore accounts. This stands in sharp contrast to the average 3% benchmark.

These findings are profound in many important ways. It means, for example, that models for assessing the tax gap (meaning, the amount of uncollected taxes) probably understate the tax gap, if such models usually assume even distribution of detected and undetected tax evasion among income groups. If undetected evaded income is concentrated at the top, it also means it should have been taxed at higher rates than previously assumed for purposes of calculating the gap. The findings also mean that standard measures of inequality severely understate the level of inequality, because such models rely on reported data, which by definition does not include unreported income, which—we now know—is concentrated within top-earning households.

In their paper, AJZ address the effects of their findings on inequality and the tax gap at length. But several other important themes—some more implicit—emerge. First, consider the fact that in Scandinavian countries tax compliance is a cultural trait. What might be the outcomes in economies where tax avoidance (and evasion) have a more favorable public view, such as the United States? AJZ indeed note that because other economies “own much more wealth offshore than Norway, the results found in Scandinavia are likely to be lower bounds for these countries.” Second, another important theme relates to the data on which we rely in tax policy making. Proposed legislation, enforcement actions, and administrative guidance all rely on modeling, which in turn rely on reported tax data. The AJZ paper at least raises a plausible argument that the entire tax-policy making process relies on severely faulty (if not incorrect) data. Finally, the AJZ paper emphasizes how leaks may affect our tax system, and point to the role of civil protest in tax. For years, policy makers and taxpayers invested significant effort in protecting taxpayers’ privacy, sometime legitimizing the offshore system as a protector of legitimate privacy concerns. These arguments make some sense in theory. But when 95% of the accounts identified in the leaks are not reported to tax authorities (as AJZ find when trying to match the leaked accounts with required reports on offshore accounts), the legitimacy of the privacy argument is diminished. It really seems that, for the most part, intermediaries in secrecy jurisdictions main function is to facilitate tax evasion and other illicit activities.

In a utopian world, we would not need to rely on leaks to provide the information needed to prescribe successful tax policies. But in this world, the AJZ paper suggests that leaks may play a helpful role in pushing us towards better tax policy. It is the leaks (and the data exposed in papers such as AJZ’s paper) that have driven recent changes in international tax law (such as the adoption of the common reporting standards and the automatic exchange of information by multiple countries). It is difficult to understate how profound has been the effect of leaks, and the following public outcry, on real tax policy. It is truly a bottom-up legal change.

There is a lot more to like in the paper, and I cannot hope to discuss it all in the confined space of this review. I will just note one of my favorite aspects: AJZ develop a model showing that after disclosing tax evasion in an amnesty program, tax evaders do not then find legal ways to avoid taxes. This suggests that discovered tax evasion is not substituted by “legal” tax avoidance, which means that anti-evasion enforcement action are efficient.

To summarize, AJZ’s paper is an early one among several others that use recent leaked data to try to empirically assess what we didn’t know we didn’t know about offshore tax evasion. The implications are profound and should guide data-driven tax policy making for the foreseeable future.

Cite as: Omri Marian, What We Now Know We Didn’t Know about Tax Evasion (and Why it Matters), JOTWELL (January 25, 2018) (reviewing Annette Alstadsæter, Niels Johannesen & Gabriel Zucman, Tax Evasion and Inequality, NBER Working Paper No. 23772 (2017)),

 Who Gets Taxed When a US Corporation Pays Dividends?

Steven M. Rosenthal and Lydia S. Austin, The Dwindling Taxable Share Of U.S. Corporate Stock, Tax Notes 923 (May 16, 2016).

The Dwindling Taxable Share Of U.S. Corporate Stock, written by Steven M. Rosenthal and Lydia S. Austin, analyzes the available data regarding the ownership of corporate stock in the United States. Over the history of the income tax, most business capital has been invested in corporations, so an assumption that the income taxation of business meant income taxation of corporations was a reasonable assumption. Similarly, most owners of domestic capital were assumed to be taxable individuals.

One could, therefore, use as a starting point for any reform proposal, the idea that a corporation would be taxed at the stated corporate rates and would make distributions of earnings to individuals who would be taxed at the stated individual rates. Rationalization of business taxation has often aimed at eliminating the incentive to engage in business investment other than through corporate entities. This rationalization (or “integration”) using these standard assumptions about the nature of corporate holdings, involves pushing the corporate tax out to shareholders (by effectively reducing rates when corporate income is distributed), or pushing the individual tax into corporations (by effectively reducing the rate on dividends received).

As many involved in the realpolitik of tax reform in the last decade appreciate, this easy starting point is no longer available. Although corporations continue to be registered in increasing numbers, and start-up enterprises continue to use them, free-standing corporations are now far less likely to either be the direct holders of productive assets or to be directly held by taxable individuals. Corporations are now much more likely to be minority shareholders in noncorporate entities, are more likely to be held by ownership chains that no long involve 80% control (the prerequisite to aggregation of entities into single entities for tax purposes) and, as Rosenthal and Austin demonstrate, more likely to have shareholders that are not taxable individuals.

The authors have set out to unpack the actual nature of the shareholder side of corporate taxation. Although it has been acknowledged for many years that not all shareholders are subject to tax on their corporate holdings, the prevailing assumption has been that most shareholders are, and thus that the earnings on capital invested through US corporations are, absent some sort of sophisticated tax planning, subject to two levels of tax. Reform has meant designing taxes such that the combination of the tax on corporations and the tax on shareholders is no more than the tax on investment made without the use of the corporate form.

Rosenthal and Austin review the work of others and the statistical reports in the Financial Accounts reported by the Federal Reserve. They conclude that a relatively low proportion of corporate holdings are subject to such double taxation. Their conclusion is that something just less than 25% of corporate entities are owned by taxable individuals. The biggest difference in the approach of Rosenthal and Austin involves disaggregating the Federal Reserve classification of “households” into nontaxable and taxable holders. Much of the nontaxable holdings are in pension plans and other preferred tax savings vehicles.

Rosenthal and Austin’s work complicates the task of rationalizing the corporate income tax. The challenge of the tax reformer becomes not simply developing a scheme that equates the taxation of returns to corporate equity with the returns made through other legal entities, but also determining which of the varied patterns of shareholder taxation should be preserved. This, in turn, requires determining whether the inducements intended when these patterns were created should be preserved, even if it means there may be no US tax imposed on some returns.

Rosenthal and Austin presented their work primarily to address the integration debate. Their work provides support for those who would push shareholder taxes in (even if this means eliminated some shareholder preferences) rather than pushing corporate taxation out, and relying on shareholder taxation. But their work has done something equally important, in showing how little we actually know about the taxation of business income. They did not attempt to unpack the corporate side of the historical assumptions. But it prompts a series of questions including the extent of investment made entirely outside of corporate entities, and the amount of investment made nominally through corporate entities but which is in fact under the control of entities in partnership with such corporations. These corporate-side questions present equivalent challenges to old assumptions about the nature of business taxation.

Rosenthal and Austin have made the work of those analyzing the taxation of business income in the US much harder. But that is a good thing, if it results in a disruption of the old approaches to integration and corporate reform more generally.

Cite as: Charlotte Crane,  Who Gets Taxed When a US Corporation Pays Dividends?, JOTWELL (December 5, 2017) (reviewing Steven M. Rosenthal and Lydia S. Austin, The Dwindling Taxable Share Of U.S. Corporate Stock, Tax Notes 923 (May 16, 2016)),