Nov 24, 2023 Leigh Osofsky
Natasha Sarin & Mark J. Mazur,
The Inflation Reduction Act's Impact on Tax Compliance—and Fiscal Sustainability (2023), available on
SSRN (May 15, 2023).
In the Inflation Reduction Act, Congress made a monumental investment in the IRS, reversing a decades-long trend of inadequate funding. A critical question is: how much was this investment worth? Government scorekeepers came up with a number of about $200 billion (yielding a $120 billion net amount, after taking into account the cost of the increased funding). But, in a new paper, The Inflation Reduction Act’s Impact on Tax Compliance—and Fiscal Sustainability, Natasha Sarin and Mark Mazur argue that these official estimates significantly understate the return on investment in the IRS. They estimate that the funding would enable the IRS to raise at least $560 billion ($480 billion, net) over the next ten years, and that, depending on taxpayers’ behavioral response, it is possible the return may actually be closer to $1 trillion.
Sarin and Mazur’s analysis is compelling for a number of reasons. Sarin and Mazur are highly qualified experts, with a blend of extensive government, as well as academic, and other, experience, including recent stints in the Treasury Department in the Biden Administration, during formulation of the Inflation Reduction Act. Their analysis reflects this deep well of experience and training, in that it draws on government data as well as academic work regarding compliance. The result is a particularly nuanced picture of how the Inflation Reduction Act funding will affect the IRS and its collection capacity. Their conclusion – that the return on IRS funding could be approximately $500 billion in the first decade and $1 trillion in the ten years thereafter – is an important one; so is their description of all the particular ways that the IRS will improve, and why this improvement is an essential part of good governance.
The analysis begins with the somewhat grim picture of IRS capacity in recent years. In addressing this history, Sarin and Mazur provide some widely known statistics, such as the very low rate of phone calls that the IRS has answered, and the high costs to taxpayers in the United States of filing their tax returns. They mix in other, striking, and less well-known information, such as the fact that antiquated IRS technology has required IRS employees to keypunch millions of tax returns by hand, simply to include the information in a tax return database. The resulting stark picture they draw of a revenue agency operating with both hands tied behind its back despite eye-popping deficit figures, is solid motivation for a better understanding of what can be gained from increased funding for the IRS.
Sarin and Mazur then expertly describe the variety of ways that official estimates likely understate the full impact of the Inflation Reduction Act’s funding of the IRS. Official estimates key off of existing estimates of the tax gap – or the amount of taxes that taxpayers owe, but do not pay. But Sarin and Mazur illustrate how these estimates of the tax gap are themselves outdated and fail to take into account some of the biggest areas of noncompliance. For instance, pass-through businesses, which have exploded in popularity since the last time they were subject to official noncompliance estimates, likely result in very high amounts of unpaid tax liability (in particular by high-income taxpayers). The difficulty the IRS has had in auditing these taxpayers means there is likely much more revenue on table than current tax gap estimates reveal, and therefore much more to be gained from the increased IRS funding.
Moreover, due to uncertainty about revenue returns from non-enforcement investments in the IRS (including in service and IT), official estimates have not attributed any return from such investments. Sarin and Mazur acknowledge that there is some uncertainty around returns from non-enforcement investments, but the return is also not likely to be zero. Instead, these investments will likely increase IRS efficiency, reduce the incidence of taxpayer mistakes, and better enable the IRS to estimate, and therefore respond to, areas of noncompliance.
Official estimates of return on funding the IRS also fail to account for the ways that a change from historically low funding levels to significantly higher funding levels is likely to have increasing, rather than decreasing, marginal returns. The IRS also now has more sources of data than in the past to help its enforcement efforts, such as more 1099-K reporting, more information from foreign financial institutions, and more K-1s reporting partnership income. Improved technology infrastructure from increased funding should allow the IRS to better leverage this data to significantly increase collections from tax enforcement.
Finally, building on academic literature about compliance, Sarin and Mazur argue that all of these direct effects of greater IRS funding may be multiplied up to three times by the indirect, general deterrence effect of increased IRS funding. Official estimates of return from increased IRS funding significantly downplay this general deterrence effect.
Importantly, Sarin and Mazur make the case that the return on increased IRS funding is not just monetary. Another important return is an improved sense of basic fairness in the tax system. At present, there are two tax systems. Most Americans, who earn income from wages paid by an employer, have their taxes automatically withheld, and therefore have little opportunity to evade. In contrast, taxpayers with income from other sources (who often are higher-income taxpayers), have more opportunities to avoid tax liability, often with the help of sophisticated tax counsel. Sarin and Mazur argue that this two-tiered system, and the distortions in the economy that result, undermine confidence in the tax system.
There is certainly a lot more to think about in terms of return on IRS funding. For instance, how should we think about allocating IRS enforcement (and service, and other) dollars among groups? How might we better incorporate non-revenue returns into the analysis? Sarin and Mazur’s analysis does not address questions such as these. But it does illustrate extremely well how much the details of the tax enforcement and compliance landscape matter in estimating the likely impact of changes in IRS funding. In this way, Sarin and Mazur model the careful analysis needed to make informed change to the IRS.
This type of analysis will continue to be critical in the coming years. The IRS’s new source of funding is far from secure. Indeed, a significant portion of it was already carved back by the debt ceiling negotiations. This, alone, means that the IRS is unlikely to be able to produce the extent of returns that Sarin and Mazur predicted. Moreover, the IRS’s operations will continue to depend on annual appropriations amounts. If Congress reduces these amounts, gains made by the IRS from the Inflation Reduction Act funding will soon be lost. Sarin and Mazur’s excellent analysis, here, and elsewhere, will be a critical part of the inevitable, continuing discussions about IRS funding in the coming years. Tax scholars, commentators, and policymakers would be well-advised to pay attention to their findings and approach.
Oct 25, 2023 Emily Satterthwaite
Following the January release of a groundbreaking study by Hadi Elzayn, Robin Fisher, Jacob Goldin, Thomas Hertz, Daniel E. Ho, Arun Ramesh, and Evelyn Smith and the resulting media, Congressional, and IRS attention, it is now well-known that Black taxpayers are audited at rates three to five times the rates of non-Black taxpayers. The audit study is a landmark both for its results (which contradict past IRS statements) and also for its novel methodology, which uses individually-estimated taxpayer race probabilities to obtain informative bounds on the racial audit rate disparity. In addition to illuminating problematic patterns in current IRS audit selection procedures, the study’s methodology offers promise for the future in investigating other race-based patterns in tax enforcement.
In what non-audit enforcement areas might such patterns arise? Here is where the prescient work of Jeremy Bearer-Friend (as cited in the audit study, P. 41) comes in, building on the work of other scholars working at the intersection of race and tax. In “Colorblind Tax Enforcement,” Bearer-Friend refutes on first principles the now-debunked claim that because the IRS does not collect race data, it cannot discriminate by race when enforcing tax laws. He points out that, for IRS agents, making inferences about the race of a taxpayer on the basis of the information provided on the return (names of taxpayer, spouse, and children, address including zip code, family structure, and occupation) is plausible and probable: “[e]ach of these datapoints can lead to inferences of racial identity in the mind of the relevant IRS personnel, with the combination of data points creating a stronger likelihood of inference” (P. 19). Moreover, at many points in the enforcement process there are telephonic or in-person conferences that allow for further racial inferences.
The paper then provides two models of racial bias that can produce racially disparate tax enforcement where IRS personnel do make racial inferences: racial animus (intentional harm on basis of race, P. 17) and implicit racial bias (harm on the basis of race that is unconscious or unintentional, P. 21). However, even if no racial inferences are made or neither of these models apply, Bearer-Friend offers a third model that can produce harmful disparate results by race: transmitted bias. This is where racial animus in another area of life determines taxpayer characteristics that intersect with tax enforcement. For example, having unstable housing as a result of racial discrimination or racially-skewed mass incarceration is associated with unstable mailing addresses, which in turn compromises a taxpayer’s ability to respond to IRS communications that are distributed by mail (of which there are many; P. 25). Transmitted bias requires neither informational inferences nor discretion on the part of an IRS agent: it operates through broader societal forces that affect taxpayers differentially by race.
Bearer-Friend goes on to identify seven tax enforcement settings that are vulnerable to racial bias as operationalized through each of the three models. He emphasizes that the seven settings are “representative” and thus non-exhaustive, but they suggest particularly promising areas of investigation. I summarize them below and offer questions that flow from Bearer-Friend’s observations.
- Summonses: The IRS has broad discretion in determining the scope of information to be summoned (e.g., range of financial documents and tax years). Such information can support racial inferences as well as determine the compliance burden of the summons. The IRS also has discretion concerning who to summon, such as the taxpayer’s business counterparty, which might have ramifications for the counterparty’s trust in or future willingness to do business with the taxpayer, and whether to enforce the summons. Thus, there is scope for racial animus and implicit racial bias. In addition, summons issuance is an area ripe for transmitted bias because a summons relies on a taxpayer’s last known address. Does the summons enforcement rate vary by the race of the taxpayer?
- Civil penalties: Many civil penalties are automated, but IRS personnel have discretion on some and can choose to abate billions of dollars in penalties. Where a taxpayer’s race can be inferred on the basis of information provided on the return, this context is vulnerable to racial animus and implicit bias. Transmitted bias also may be present here: in the case of the penalty for civil fraud, for example, the taxpayer’s use of cash is a factor that weighs in favor of finding fraud. However, the use of cash is racially non-neutral due to a history of racial animus in banking. Do penalty abatement rates vary by the race of the taxpayer?
- Appeals: The IRS Independent Office of Appeals is instructed by the Internal Revenue Manual to use their “experience and judgement” when reviewing the merits of a case for settlement. This discretion, plus the fact that settlement conferences are held telephonically, virtually, in person, or through correspondence, opens the door to disparate racial treatment via racial animus and implicit racial bias. While many difficult-to-observe aspects of cases are likely to affect settlement rates, investigating which cases settle and whether race appears to be a factor might be revealing.
- Offers in compromise: The decision to accept an offer in compromise is discretionary and, regardless of the grounds on which it may be requested, the Internal Revenue Manual instructs collections officers to contact a taxpayer telephonically to collect additional information necessary to consider the offer. Here again, there is scope for racial animus and implicit racial bias. Do rates of acceptance of offers in compromise vary by race?
- Collection due process hearings: Taxpayers who receive a notice of collections (a lien or a levy) from the IRS can request, in writing within 30 days, a Collection Due Process (CDP) hearing. The hearing occurs in person or telephonically with a settlement officer in the IRS Appeals Office, who exercises discretion in proposing or agreeing to a settlement. Thus, racial animus or implicit racial bias may be present. Transmitted bias may also arise: the notice of collections is valid if sent by certified mail to a taxpayer’s last known address, even if the taxpayer has no actual knowledge of the notice. Among taxpayers who are mailed a notice of collections, do rates of requests for CDP hearings vary by race?
- Innocent spouse relief: To request relief from a spouse’s tax liabilities for taxpayers deemed to be innocent spouses, a taxpayer must file Form 8857, which is evaluated by an IRS technician. The form has narrative sections that can “include qualitative information and natural language patterns;” the technician may also review “personal financial information that might also imply racial identity” (P. 43), thus allowing for racial animus or implicit racial bias. In addition, transmitted bias may occur if there are behavioral patterns in who feels empowered to submit a form in which substantial personal disclosure is required. In cases where joint and several liability of a spouse is at issue, do filing rates for Form 8857 vary by race?
- Criminal tax referrals: Although no single CI agent can make a recommendation to DOJ’s Tax Division without review by a supervisor (P. 45), agents have substantial discretion regarding which referrals to pursue and how much investigating to do, a process which often involves the IRS’s broad summons power, which can produce racially-revealing information (discussed above). In addition, to the extent that certain kinds of cases are less likely to be recommended for prosecution, and the defendants in those cases are more likely to be white (i.e., recipients of pass-through income, according to a Tax Policy Center study that Bearer-Friend cites), racially disparate outcomes may occur through transmitted bias. DOJ collects and reports the race and ethnicity of defendants in its prosecutions. How would a similar report by CI look? Are there racial patterns in the referrals that are chosen for investigation?
Bearer-Friend is clear that his review of the scope for racial bias in these tax enforcement settings “is not an assertion that such racial bias is already occurring at the IRS” (P. 47). The problem, rather, is that at the time that Bearer-Friend was writing, current data practices at the IRS inhibited such an inquiry. To address this, Bearer-Friend recommends exactly the kind of imputation techniques that both the audit study and a Treasury Department analysis of tax expenditures have since performed. Analyzing IRS enforcement procedures for possible racial bias is thus feasible (although it is far from costless, which is one more reason that IRS funding increases must be preserved). Bearer-Friend’s article gives us tremendously fruitful suggestions for where such analyses should start.
Sep 27, 2023 Daniel Shaviro
Bradford DeLong’s career opus, Slouching Towards Utopia, is a very long – although, in my view, consistently illuminating and entertaining – work of economic history that only very briefly, for a few pages here and there, touches on the history of taxation. Why, then, do I regard it as offering a highly suitable subject for a Jotwell Tax column?
The broader answer to this question is that historical context is vital to understanding tax (like other) institutions and ideas and yet often is ignored, other than by tax historians. The narrower answer, illustrating this broad proposition, pertains to the particular context of the great intellectual shifts that have occurred over the last thirty-plus years, not just in legal academic thinking, including in tax, but in American intellectual and political life more generally.
Slouching Towards Utopia concerns what DeLong calls the “long twentieth century,” which he views as having run from roughly 1870 to 2010. He argues that these 140 years were “the most consequential of all humanity’s centuries” (P. 1), above all because – despite disasters along the way, such as two world wars and the Great Depression – they featured startlingly high rates of annual per capita economic growth. During this period, he estimates that annual growth averaged 2.1 percent per year, as opposed to 0.45 percent over previous centuries (P. 3), and perhaps 0.6 percent in the years since 2010 (P. 516). This rapid growth rate triggered a more than an eightfold increase in world income per capita from the beginning to the end of the “long century” – despite an immense concomitant rate of population increase – transforming everyday life around the world for the (at least materially) better, by reducing dire poverty and allowing luxury goods to be widely available, rather than being limited to people at the top of the income distribution.
The causes of high growth, as DeLong views it, were not predominantly rooted in government policy, except insofar as it established stable conditions and got out of the way. Rather, the growth explosion reflected technological developments that gave rise, for example, to “full globalization, the industrial research laboratory, and the modern corporation” (P. 3). Moreover, growth’s then abating was probably not, in the main, due to policy failures towards the end of the “long century,” as these did more to worsen equity than efficiency or growth. While these are not entirely novel claims, DeLong particularly emphasizes both (P. 1) just how transformative and historically unprecedented the technology-fueled growth was, and (P. 2) how little it was affected by prominent policy levers (although it could affect them).
This brings us, however, to the great policy shift that occurred about thirty years before the high-growth era’s end (albeit, during a period of economic stress). As DeLong notes, starting in the mid-1970s “[t]here was a sharp neoliberal turn away from the previous order – social democracy – of 1945-1973. By 1979 the cultural and political energy was on the right. Social democracy was broadly seen to have failed, to have overreached itself. A course correction was [seemingly] called for” (P. 429). The likes of Reaganism and Thatcherism provided it in the public political realm, although their efficiency payoff, if any, proved starkly disappointing (P. 443).
What explains the great neoliberal turn? To DeLong,
the greatest cause was the extraordinary pace of rising prosperity during the Thirty Glorious Years [of post-World War II social democracy], which raised the bar that a political-economic order had to surpass in order to generate broad acceptance. People … had come to expect to see incomes relatively equally distributed (for white guys at least), doubling every generation, and they expected economic uncertainty to be very low, particularly with respect to prices and employment…. And people then for some reason required that growth in their incomes be at least as fast as they had expected, and that it be stable, or else they would seek reform (P. 429).
The late 1970s’ apparent failure, relative to these high expectations, led to an intellectual shift that proved highly stable, for decades to come, despite its failure to provide anything close to the promised benefits.
DeLong also notes racism’s contribution to the rightward turn (in politics, whether or not in legal scholarship). He writes, for example, about Nobel laureate George Stigler’s angry insistence, in the face of impending civil rights legislation, that racial inequality was almost entirely Black people’s fault (P. 438) – a product of what he viewed as their intellectual and moral inferiority, and made worse by their rising “insolence.” As DeLong rightly notes: “The word ‘insolence’ is truly the tell” (P. 439).
While DeLong does not address the tax or other legal scholarship of either that or more recent eras, a rightward and neoliberal turn arose (and then abated) in such scholarship as well. Early law and economics writings, heavily inflected with “Econ 101ism,” seemed to show that various types of regulation, ranging from rent control to antitrust to corporate governance, were almost invariably naïve and counterproductive. In tax policy, analogous views spread as to imposing high marginal rates, or indeed imposing any tax at all on “normal” returns to capital. There has since been a shift in both fields back towards restated versions of the views that neoliberalism had seemingly cast aside.
Slouching Towards Utopia is far too broad and rich in its coverage of the last two centuries of (mainly American and European) economic, political, and even military history for it to be reduced to merely a discussion of neoliberalism’s rise and disappointing fruits. The main reason for reading it is to enjoy and reflect on DeLong’s broader, and highly varied, historical and intellectual themes, spanning much of the last two centuries. But its reaching that topic, among many others, gives particular food for thought to tax scholars who are interested in the last few decades’ course of the field.
Aug 29, 2023 Adam Thimmesch
The fiscal federalism literature has long recognized that the mobility of capital and labor counsel toward the use of benefits taxes, like property taxes and fees, at local levels to avoid distortions in the location and amount of economic activity. The strength of this accepted wisdom on tax assignment has changed slightly since the so-called “first-generation theory” of fiscal federalism, but the general notion remains strong that local jurisdictions should not impose income taxes on local business activity, because of the risk of losing tax base. And in an era where workers and businesses are more mobile than ever, a tax on local workforces and business income would seem to be on a particularly poor footing.
In The Surprisingly Strong Case for Local Income Taxes in the Era of Increased Remote Work, Erin Scharff and Darien Shanske provide a compelling counter narrative to this accepted wisdom. In doing so, Scharff and Shanske contribute significantly to the fiscal federalism literature and to the current debates about how the ease with which labor and capital can move in the modern world should shape how governments fund their operations, both within the United States and globally.
Income taxes within the United States are of course underinclusive of actual income, and tax scholars broadly recognize that the federal income tax operates more like a wage or consumption tax for many taxpayers. The use of the term “income tax” is thus a bit of a shorthand. This point applies equally at the local level, and Scharff and Shanske’s article catalogues a variety of local impositions that fall within their ambit of “local income taxes.” The authors’ detailed discussion of these different local income tax structures demonstrates the wide variety of local income taxes that exist and introduces the taxes’ different legal structures, histories, importance, and challenges.
To critique “local income taxes” without understanding these differences misses a lot. A local income tax need not be a highly progressive tax that piggybacks on the breadth (or narrowness) of the federal income tax. A more targeted local payroll tax, for example, can raise revenue on a similar base while leveraging administrative efficiencies, and it counts as an income tax (or at least not a benefits tax) in the authors’ analysis.
The wide range of potential income tax instruments is important, but the question remains regarding whether local jurisdictions can impose income taxes without losing their tax bases. With so many localities from which to choose, why would any taxpayer work or locate in a jurisdiction imposing such a tax? Here, Scharff and Shanske answer largely with the economies of agglomeration, a concept recognizing that businesses and individuals benefit from being near one another. The economies of agglomeration help to explain the historic inter- and intrastate migration toward large population centers despite the higher costs that often attend those moves. Recognizing these economies, Scharff and Shanske argue that local jurisdictions may indeed be able to charge for access to their markets consistent with the benefits principle of taxation. Income taxes can approximate benefits taxes if properly structured. The benefits tax/income tax distinction is a false dichotomy.
The ultimate question underlying much of Scharff and Shanske’s article—and the question confronting governments worldwide—is the extent to which remote work and electronic commerce have reduced, or will continue to reduce, agglomeration benefits and thus shift how workers and workplaces will locate their operations in the medium and long term. The authors seem to share my own intuition that the current concerns over massive remote-work fueled migration should be moderated and evaluated rather than be used as reason to philosophically abandon the income tax.
As many of us have experienced after the surge of required remote work during pandemic-related work closures, connections still matter. And community still matters. Analyses of the best uses of different taxes by local governments should not assume that every, or even a majority, of jobs will be fully mobile and responsive to local taxes independent of other factors. The market may shake out very differently.
Scharff and Shanske’s article also accurately notes that discussions of tax assignment should also consider interests beyond efficiency. The authors focus specifically on equity and revenue stability as local interests that might counsel in favor of properly designed local income taxes. On the issue of equity, Scharff and Shanske brush against a deeper literature evaluating the distributional effects of traditionally accepted local funding sources like the property tax. They also reference local fines and fees, which can be targeted at low-income taxpayers and have racially disparate effects. Traditional benefits taxes may be “efficient,” but they can also result in inequitable funding measures that may not be offset with the type of state or federal grants that are often a part of economic analyses in the fiscal federalism literature. Thinking more broadly about income taxes as potential benefits taxes may help to address equity in that regard.
Revenue stability also matters a great deal at the local level, where borrowing is not as much of an option to help smooth spending as at the federal level. Scharff and Shanske particularly note the impact that revenue volatility can have on progressive local spending. Local revenue shortfalls often lead to regressive results through spending cuts, and evaluating the potential for mildly progressive local income taxes in this regard is critically important for those interested in the overall distribution of local government taxes and services.
Beyond theoretical concerns about the best tax base, the authors also address the very real and multiple administrability, constitutional, and other policy-based concerns raised in the existing literature. Here, Scharff and Shanske draw upon their knowledge of different taxing regimes like unemployment taxes and corporate income tax apportionment rules to analyze potential approaches to local income taxation that would best balance administrability for taxpayers with local governments’ needs for revenue to fund local services. These are all important topics, and the authors do an admirable job of addressing current challenges to their arguments, of considering the existing literature challenging local tax choices, and of setting the stage for future work in this area.
Scharff and Shanske conclude their article with brief consideration of the role of the states in helping local governments and a limited discussion of basic implementation principles, but the key work of this article is in providing a counter narrative to the existing literature by being open to the potential role of local income taxes in the local tax mix of the future. My own intuition is much like the authors’. The contours of the economy of the future and where the dust will settle on remote work are unknown. Local jurisdictions, however, have current needs, and their spending will continue to create agglomeration benefits that support the imposition of appropriately designed local income taxes.
Cite as: Adam Thimmesch,
Taxing the Value of Being Together, JOTWELL
(August 29, 2023) (reviewing Erin Adele Scharff & Darien Shanske,
The Surprisingly Strong Case for Local Income Taxes in the Era of Increased Remote Work, 74
Hastings L.J. 823 (2023)),
https://tax.jotwell.com/taxing-the-value-of-being-together/.
Jul 14, 2023 Neil H. Buchanan
Why are gender and unpaid work issues continually marginalized in tax policy analysis? After all, feminist legal theorists have spent at least two generations trying to address questions that should be at the center of any analysis of government policy, no matter one’s political priors. People who want to turn the clock back to a 1950’s-style gendered hierarchy, for example, surely would want to know that their version of utopia (which, to be clear, I find positively dystopian) cannot possibly be created without understanding how government taxation and spending policies change people’s decisions about marriage and divorce, child-bearing and -rearing, the challenges of poverty (both sudden and chronic), and so on. Progressives are typically more aware of those connections, but somehow the “tax is different” mantra prevents many people from seeing that gender justice and tax justice are inseparable.
Miranda Stewart, a professor of tax law at the University of Melbourne, has long carried on important work to bring these issues to the fore. Her latest book, Tax & Government in the 21st Century, is a masterwork that covers the full range of issues that confront us, from savings and wealth, to corporate and business taxation, to the global digital economy, and every important issue in between. She builds her book on historical and philosophical foundations, discussing Adam Smith and the interactive development and evolution of states and capitalism (of various varieties). Confronted with a veritable buffet table of enticing potential topics to savor in this short review, I find that her most profound contribution (among many) is in Chapter 5, “Tax, Work, and Family.”
Most books that have attempted the daunting task that Professor Stewart tackles here with such grace have, like much of the literature in this field more generally, tended to treat gender and family issues as a niche topic, as I noted above. In this book, those issues are given equal airtime with classic tax policy topics like capital gains taxation or international jurisdictional disputes. That makes sense, of course, because Professor Stewart is deeply familiar with feminist legal theory, even as she has expertise across the range of topics that she covers in this book.
She begins by defining the “tax state” as having the power to tax but also being dependent on taxation to fund its own activities, noting that wealthier countries, including most of the members of the Organization for Economic Cooperation and Development (P. 3), are tax states. How have those countries’ tax and expenditure systems responded to, and in turn changed, people’s experience of gender and family issues, paid work, and the unpaid work of providing for those who need care? Professor Stewart demonstrates that these issues should be at the front of everyone’s mind, especially policymakers whose decisions (even when they decide to leave policies unchanged) will alter the future.
A particular strength in Chapter 5 is the impressively brief explanation of a fundamental question in all of tax analysis, the “tax unit.” This is where feminist tax theorists have had a significant impact (one that should be even greater, to be sure), because it matters enormously whether the state taxes a “family unit” as a collective entity or instead taxes each individual person within society – no matter their family status – as a solo unit. Professor Stewart offers this summary of the intellectual history of this insight:
Feminist tax theorists pioneered a tax discrimination analysis that argued for an individual unit on efficiency and equity grounds. A key reason or this trend was changing demographic patterns, especially the increased participation of women in the workforce.
The rules about the tax unit, combined with personal and family exception, allowances and transfers, mark a gendered boundary between the ‘taxed’ market and ‘untaxed’ private or domestic family life. Home production is not subject to the income tax, although in a comprehensive income tax applied to individuals, it would be. (P. 126.)
This sleek, stripped-down prose communicates matter-of-factly what is in fact a rather revolutionary thought to a lot of people: there is no “natural” default when it comes to setting up a tax system, even on one of the foundational questions of tax policy: Who will be required to pay taxes? And the choice that we make affects social choices, as Professor Stewart goes on to explain, by changing the marginal tax rates faced by different people, depending on whether their partners’ or spouses’ tax situations are included in their own computations. She concludes:
It is estimated that in Germany and Belgium, moving from a joint tax unit [taxing a couple] to an individual tax unit [taxing each person in the couple separately] would increase women’s work hours by 25 to 35 per cent. In response to these findings, the European Parliament has called for the elimination of joint or family-based provisions in the tax laws of all EU member states and their replacement with individual based rules. (P. 127.)
This analysis is supplemented by an explanation of how eligibility rules for parental leave, child-care costs, fighting discrimination against fathers who take parental leave, child credits (which are now the method by which the US tax code subsidizes child-rearing costs, after the repeal of personal exemptions as part of the most recent major tax legislation in the US took effect in 2018), and other purportedly pro-family policies interact with the “tax unit” question in unexpected ways. She reports that “[a]cross the OECD, women’s careers are one third shorter, on average, than men’s and are much more likely to involve part time work.” (P. 128.)
The analysis in Chapter 5 builds on a discussion earlier in the book on budgeting, which includes a discussion of how governments’ summaries of their budgets can highlight gender imbalances. Professor Stewart describes “Gender Budgeting” (Pp. 71-72) as a way to highlight how these nominally neutral tax and spending policies affect people unexpected ways – ways that would otherwise be erased through the use of supposedly “gender-blind” budget summaries.
While it is not quite accurate to say that the tax-policy book market is a crowded one, there are surely plenty of perfectly fine books from which to choose, all of which cover the standard topics (tax base, international tax, wealth taxation, and so on) well enough. What makes this book stand out is not only its breadth and readability but a keen focus on how our tax system can have hidden impacts on people – and bringing those impacts into the light.
Jun 19, 2023 Adam Rosenzweig
Steven Dean,
Surrey’s Silence: Subpart F and the Swiss Subsidiary Tax that Never Was, Brooklyn L. Sch., Legal Stud. Paper No. 728, available at
SSRN (Mar. 28, 2023).
As has become almost cliché at this point, the international tax regime is facing a defining moment … spearheaded by the Base Erosion and Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD). While BEPS addresses a wide-ranging number of topics, one of its primary focuses is combating tax havens. BEPS is the successor to the 1998 OECD Harmful Tax Competition project which, unlike the wide ranging BEPS, focused almost exclusively on a “name-and-shame” campaign against tax havens. These anti-tax haven efforts can trace their history back to the enactment of “Subpart F” of the Internal Revenue Code which is typically considered the first concerted anti-tax haven effort. The intellectual force behind Subpart F was Assistant Secretary of Treasury for Tax Policy Stanley Surrey (while he was on leave from the faculty at Harvard Law). Surrey has been referred to as the greatest tax lawyer of his generation; his influence can be felt to this day throughout the tax laws of the United States and the world.
In the face of this towering presence, Steven Dean dares to ask the question “Was Surrey racist?” in his new article Surrey’s Silence: Subpart F and the Swiss Subsidiary Tax that Never Was. This question is not buried in a footnote or even in the final section but is the first three words of the abstract. The effect is palpable, in part because the reader is forced to consider the provocative question in a vacuum without the benefit of reading the article itself. As with all good use of rhetorical hyperbole, Dean effectively employs strong language to shake the reader’s assumptions and open space to consider a difficult topic in a deep and subtle way.
Dean deftly works within this newly opened intellectual space to introduce the broader thesis of the article – is it possible that the international tax regime as a whole could be imbued with implicit bias from its founding? The argument (substantially simplified) goes as follows: (1) Surrey and his team began the Subpart F project focused specifically and primarily on Switzerland. which was the jurisdiction of choice for the largest US corporations seeking to avoid or evade US taxes; (2) by the time Subpart F was signed into law, Switzerland had disappeared from the legislative narrative; and (3) in its place a new narrative had emerged focusing mostly on small, Caribbean island nations as so-called tax havens.
The article utilizes the so-called “Liberia problem” developed in earlier work as an illustrative example. In summary, the article explains how Liberia was included on one of the first iterations of lists of abusive tax havens, without any tax-related justification. Despite repeated efforts, neither Liberia nor academic tax experts could get Liberia removed from the list, despite consensus that there was no substantive reason for its inclusion. It was not until extraordinary efforts were undertaken by the United States that Liberia was eventually removed from the list. At first it might not seem clear what this has to do with Stanley Surrey, and I think ultimately that is the point. From this perspective, the Switzerland example and the Liberia example stand in stark contrast. There was overwhelming evidence of Switzerland’s role as a tax haven, yet all mention of it was scrubbed from the ultimate version of Subpart F. In contrast, there was no evidence of Liberia’s role as a tax haven, yet overwhelming efforts were necessary for it to be removed from a list of tax havens. The article leaves the reader to sit in that contrast, forced either to attempt to intellectually rationalize the two examples or yield to Occam’s Razor and admit the obvious racial difference.
This epiphany unifies the paper, and the opening rhetorical question slowly begins to take shape in context. Was Surrey racist? Does it matter? Or might the better question be – did Surrey’s legacy manifest itself as implicit racial bias throughout the international tax regime? Regardless of Surrey’s actual beliefs, the article highlights that today there is no doubt that the term “tax haven” in fact invokes visions of beaches in the Caribbean and not snow in the Alps thus raising the question – why does virtually every academic article use the Cayman Islands or Bermuda as examples of a tax haven rather than Switzerland or Ireland?
Under this framework, the article then narrows focus from the regime as a whole to the term “tax haven” itself. Since at least the 1998 OECD Harmful Tax Competition project the term “tax haven” has been explicitly associated with “harmful” competition. In fact, the “tax haven” label has been used consistently as a cudgel; today merely being labeled a “tax haven” can be enough to force changes in policy. But what if the term is also tainted with implicit racial bias (in the sense of a bias against applying the label to majority-white countries)? In that case, the conclusion quickly emerges that explicit normative association of “tax haven” with “bad” can construct an implicit and powerful association of “bad” with majority non-white countries.
While reading the article I found myself repeatedly thinking, “if someone as brilliant as Surrey couldn’t recognize his own implicit bias, then what chance do I have?” Rather than feel hopeless, however, I found the internal dialogue inspiring. What if the one crucial difference between Surrey and myself is precisely that I am having this internal dialogue? In this respect perhaps the greatest strength of Dean’s article is its ability to engage a reader in such a dialogue, and thereby invite the reader to join the difficult, at times painful, and ultimately crucially important life-long conversation the world needs.
May 18, 2023 Kim Brooks
The hard work that went into authoring The Administrative Foundations of the Chinese Fiscal State is palpable from the first page. Cui seeks to achieve two aims: (1) to tease out aspects of Chinese taxation of general interest to policy makers and social scientists in other countries (P. 3) and (2) to offer a new framework for understanding the policies and politics of taxation in China (P. 4). Both aims are accomplished handily.
Particularly fun for those of us who like tax administration, Cui claims that ground-level tax administration is essential to understanding the Chinese tax system. Focusing on tax administration, tax collection and revenue mobilization, allows Cui to show us something new about our own tax systems. He offers us the opportunity to see more clearly our own paradigmatic orientation: one that centres the importance of rule of law.
Instead of accepting standard stories – that third-party reporting will reduce evasion, that offering incentives to tax administrators will facilitate greater collection of tax revenues, and that boosting taxpayer morale and enhancing audit capacity will result in greater revenue collection – Cui explores how the Chinese tax administration has managed to enhance its gross tax ratio without relying on the standard advice.
Perhaps most fascinating for those of us used to the dominance of “rule of law” as a necessary feature of a functioning social order, Cui’s work demonstrates that “a state that is organized, peaceful, and in many ways compatible with modern market economies may nevertheless largely dispense with legal norms” (P. 18). Cui’s bold claim that “law may be an inessential instrument for governance” (P. 18) is likely to make some of us squeamish. Such a fundamental challenge to our narratives about the importance of law in tax (or any other subject) is absolutely worth reading.
If the broad claim (about the relative unimportance of law) gives us pause, it’s possible that Cui’s exploration of the practices of tax administration in China might be recast in ways that nevertheless affirm our sense of the importance of “law”. Cui’s book offers a deep dive into the practices of tax administrators. For those of us inclined to legal pluralism as a paradigm, tax administration practices are law – just not formal law “on the books”. Put another way, in the space left by formal legal rules, Cui finds hundreds of thousands of non-specialized revenue managers in tax administration.
I admit to having carried Cui’s book with me on many flights intending to read it and yet feeling daunted, but once I got started I could not put the monograph down. It is filled with fascinating insights: from an exploration of how China’s revenue management system persisted through the importation of substantial legal reforms in the mid-1990s to an examination of how “audit” is a misnomer for the kinds of activities undertaken by tax administration personnel (which is more like a “self-inspection” or tax amnesty process). Cui develops a concept of “atomistic coercion” (a kind of non-rule-based tax collection practice exercised by individual tax administration personnel). He dives into what he calls the “paradox of taxpayer information”: that if you need good quality information to secure compliance it is likely unavailable and when that high-quality information is available you likely don’t need it. And his expertise on value added taxes, in particular, shines through (I suspect inadvertently, since the particularities of the formal tax system is not the direct focus of Cui’s work in this monograph).
In addition to Cui’s detailed and thoughtful analysis, another feature of the work that makes it a must read bears mention. Occasionally you get glimpses of Cui himself – for example, where he recounts stories of his own experiences teaching in China, meeting with tax administration personnel, or getting a foot massage. These stories gave me a much richer sense of how Cui came to build his theory of tax administration, policy making and politics. And his observations from his experiences enabled me to better see the thoughtfulness behind his questions and his approach to making sense of the Chinese tax system.
Apr 18, 2023 Jon Choi
Brian D. Galle & Stephen E. Shay,
Admin Law and the Crisis of Tax Administration, __
N.C. L. Rev. __ (forthcoming 2023), draft available at
SSRN (Jan. 27, 2023).
Tax regulations and subregulatory guidance abound with apparent giveaways to taxpayers, favorable interpretations with little or no statutory justification. Examples include the check-the-box rules, the waiver of 382(l)(5) net operate loss carryforward limitations during the financial crisis, and many more. On the other hand, it’s hard to think of cases where Treasury or the IRS has deviated from the statute at taxpayers’ expense. The typical explanation for this asymmetry is standing doctrine: if my tax bill is too high because of an agency rule, I can sue the government, but if it’s too low, nobody can sue to raise it. Now, a terrific new article by Brian Galle and Stephen Shay considers the implications of this “tilt against revenue” for administrative law.
Galle and Shay bring a fresh perspective to the classic debate on administrative tax exceptionalism. They suggest that the tilt against revenue cuts against the formalist, anti-exceptionalist position (most famously promoted by Kristin Hickman) that tax regulations should follow the same procedural rules that apply to all other regulations. Instead, they suggest that courts should counter-act the tilt against revenue by applying administrative law requirements more leniently to Treasury and the IRS.
To illustrate their arguments, Galle and Shay consider as case studies two regulatory interpretations of the GILTI rules, one pro-taxpayer and one anti-taxpayer. The pro-taxpayer regulation was lauded by comments submitted by interested parties and will likely never be challenged due to lack of standing; the anti-taxpayer regulation was heavily criticized (again by interested parties) and will likely be challenged in court. The article also helpfully summarizes existing literature on the standing asymmetry in tax law, written by scholars like Larry Zelenak and Daniel Hemel.
And although Galle and Shay begin with the problem of standing, they don’t end there. They catalog how a variety of current administrative conditions create a bias against the collection of revenue. For example, the current IRS resource deficit makes it difficult for existing tax regulations to be adequately enforced as written, making IRS action more difficult and further favoring taxpayers.
So what’s the solution? Galle and Shay essentially propose a thumb on the scale against taxpayers in tax administration, essentially a tilt toward revenue to counteract the existing tilt against revenue. They lay out some concrete suggestions relating to ongoing debates in administrative tax law: for example, they suggest that courts should be more lenient in declaring tax regulations “interpretive” and therefore exempt from notice and comment, and more generous in applying the exceptions to notice and comment for “good cause” or “harmless error.”
One of the article’s best features is that it deftly navigates the difficult line between normative and positive arguments. Many tax scholars may find Galle and Shay’s arguments persuasive as a normative matter but have lingering doubts as a matter of positive law. Consider the basic case against exceptionalist tax administration: the Administrative Procedure Act purports to apply to all agencies equally, and nothing in the statute justifies special treatment for the IRS. But as Galle and Shay argue, courts must make normative policy judgments all the time in tough cases, and their normative judgments are the basis of much of the common law surrounding the APA. Thus normative judgments are unavoidable, and perhaps even desirable, even when one takes a positivist view of statutory administrative law.
Whether you agree or disagree, Galle and Shay’s new article makes a valuable contribution to the literature on tax administration and is well worth a read.
Mar 8, 2023 Charlene D. Luke
In Taxing Data, Omri Marian argues that taxing data-rich markets requires rejecting income taxation—not only as implemented but also “in its optimal theoretical form”—as the best proxy for ability to pay. Instead, Marian makes the radical suggestion that data itself “may be a better proxy” for ability to pay, and he offers three fundamental features that should guide “a reimagined tax on data.”
The article is rich in detail and is at its most persuasive in discussing the income taxation of business entities. Drawing on the work of tax historians and scholars, Marian summarizes two dominant narratives explaining the origins of the corporate income tax: the corporate income tax as a proxy for shareholder income, and the corporate income tax as a means to rein in management. Marian points out that if corporate ownership and management is largely local and traceable, which it was “at the dawn of corporate taxation,” then “whether the attempt was to target shareholders’ ability to pay, or managerial interest, the taxation of corporate income made sense.”
On the horizon, however, was a perfect storm of globalization, dispersion, and “intangible-ization,” which, Marian asserts, “our data-rich economy amplifies by orders of magnitude.” These forces have now so completely swamped the corporate income tax’s ability to identify source or ownership and to measure value that it is time to “revisit our conceptual tax design.”
Dispersion, for example, is not only a matter of diffuse, multi-layered ownership, but it also “defines all other functions of the modern multinational corporate entity.” If corporate income taxation no longer operates “as a functional instrument to tax corporate owners or managers,” then there is “no substantively meaningful corporate ‘home’” to support residence-based taxation. Marian asserts further that, because “‘value creation’ is fragmented, outsourced, and facilitated through a multitude of intercompany transactions between affiliated companies,” “‘source taxation’ in the context of corporate entities seems equally meaningless.”
In turning to “intangible-ization,” Marian emphasizes that the “transformation of capitalism” wrought by intangible investment overtaking tangible investment has caused “insurmountable tax administration challenges.” Among these is the obvious difficulty of measuring intangible investment, and “[i]f we cannot measure investment, how can we measure the return on investment.”
As Marian notes, the challenges to the income tax arising from globalization, dispersion, and intangible-ization are well known and have yielded multiple reform efforts, including the OECD’s recent two-pillar approach. While Marian applauds these reform efforts, he concludes that they will be insufficient because they continue to rely on the concepts of source, residence, ownership, and monetary value.
Marian contends that, to reach the data economy, what is needed is a bold move away from reliance on income as a tax base. This would include moving away from reliance on proposals tied to consumption or savings since they are simply “economic components of income.” He argues that a data tax would provide an administrable, equitable and efficient solution, and he proposes three fundamental features for such a data tax. The combined effect of the three fundamental features is somewhat reminiscent of a wealth tax, but one that is tied to data volume, flow, and use rather than to monetary value and ownership.
First, the tax base should be raw data, so that the “tax depends on the volume of data, not on the monetary value of data.” Marian explains that “each little piece of data” generally has no measurable value because “[o]nly when terabytes of data come together do they become valuable, and only because they are aggregated.”
Second, tax should be “collected on the flow of data.” This approach alleviates the need to source the data to a particular location. Marian explains that the source of value of data is “probably not where people whose data [is] collected reside because . . . each individual piece of data has no value.” Trying to locate source where “the data is analyzed. . . also seems theoretically farfetched” given the dispersion of those locations and that much of the “manipulation of data is outsourced to robots.” He posits that such a tax would be readily administrable given that it is clearly possible to tie fees to data volume given the use of such measures by internet service provider and cell phone data plans.
Third, “the users of the data” should be the taxpayers. This approach allows for a tax not dependent on ownership, which is needed because owning data “is in no way an economically meaningful concept.” As an example, Marian discusses data “owned” by both an individual and by Google: “If both you and Google own your data, have you and Google experienced an equal increase in your ability to pay?” The answer is, unsurprisingly, that the “data is more beneficial to Google, because of the other data it has.”
Marian acknowledges that these features could lead to equity concerns, but he argues that, as is also the case with other types of taxes, “generous exemption[s]” could be provided in working out system details, and the tax burden could be made progressive based on data usage. He notes, “[d]ata-rich taxpayers are also the richest taxpayers in traditional terms.” Further, because a data tax would reach taxpayers who are adept at avoiding an income tax, adding such a tax will increase progressivity.
Marian reasons that a data tax would be efficient, in the sense that it is unlikely to change taxpayer behavior. He likens a data tax to mineral taxation: “Activity must happen where the minerals are. As long as the tax is not prohibitively expensive and there is profit to be made, activity will take place where the valuable resources are found.” It is possible, he concedes, that some data users will pass the burden onto others “by charging for . . . services that are now free.” He points out that this is not a bad thing—first because it may decrease use of platforms that are arguably causing social harms, and second, because this would generate income that could be taxed under the current income tax system.
In the final section of his article, Marian reviews existing proposals for direct taxes on data or for data proxies. For example, he discusses a proposal from the mid-1990s by Arthur Cordell for a “bit tax,” as well as suggestions for taxing the infrastructure for the transmission and collection of data. Although Marian does not dismiss any proposal out of hand, given the three fundamental features outlined above, he clearly favors a tax that functions as an excise on data volume.
While the article’s scope did not permit addressing the full range of detailed issues that would have to be worked out in implementing a data tax, Marian more than fulfills his stated goal of “start[ing] a discussion about a data tax as a remedy for the failure of income taxes in data-rich markets.”
Feb 6, 2023 Leigh Osofsky
In this illuminating article, Heather Field describes her adoption of a flipped classroom model for teaching tax law during the pandemic. Like many, Field learned lessons from her pandemic teaching that will continue to be instructive now that we are (hopefully) back to an in-person teaching world. Field’s thoughtful article is well worth a read for those (like me!) wanting to do more with flipped classroom teaching.
As Field describes, a flipped classroom involves moving content delivery outside of the classroom (for instance to pre-class videos created by the instructor), thereby creating more space in the class period for active learning in the form of activities and problems. The purported benefits of flipped classrooms include more time for active student learning in class, the ability of students to learn and review content from the videos at their own pace, and the possibility of more differentiation in in-class problem sets. Flipped classrooms certainly were not new to the pandemic, but rather had existed in a variety of educational spaces prior to the turn to remote learning. However, like Field, many professors had not embraced the flipped classroom before the emergency teaching experience that was Spring 2020.
Field’s flipping of classes involved providing students before-class mini-lecturettes, which gave students an overview and explanation of the material. Class time was then spent going through problems, potentially with polls and additional bonus problems added in to the class to better gauge student understanding. Overall, her experience was a positive one. Students appreciated the opportunity to review the content at their own pace and potentially revisit it, students had more time in class to work on problems, Field was better able to direct students to the important parts of the course, weaker students were able to participate more fully in the class, Field could cover more difficult material much more efficiently, and Field had the opportunity to think more carefully though all her explanations of the course material.
One of Field’s most interesting insights is how a flipped classroom allowed her to exchange certain types of classroom rigor for other types. One of her principal concerns with flipping a classroom was that it would reduce rigor. By providing students with explanations of the law, she worried, she would relieve students of the difficult task of having to interpret the law themselves. This was particularly concerning to Field in teaching tax law, because a big part of the job of tax lawyers is to read the primary source tax materials themselves and explain the materials to someone else. To some extent, Field found that her concerns about rigor were not entirely unfounded – when she explained a statute in a pre-class video, students did not have to try to make sense of it themselves first. However, Field unexpectedly found that the use of the videos also created opportunities for new kinds of rigor. With a quicker understanding of the basics of the law, students had time to examine harder problems. They also had time to work on other skills, such as using the law to engage in planning or strategizing.
I found this insight particularly valuable for a couple of reasons. First, it emphasized that, as professors, we should be trying to teach our students a variety of lawyerly skills. How to read and interpret the law as a primary source is a critical skill students should learn, but so are more advanced skills such as how to apply the law in strategic ways. I also appreciated Field’s insight because it illustrated how pre-class videos need not be an all or nothing approach. As a professor, I tend to favor using the same type of format each class. This can be useful (in terms of developing teaching routines), but I think Field is right that professors should first think through what their pedagogical goals are on a given day, and then think about how and whether pre-class videos will help facilitate those goals on that day.
In addition to some of these major lessons, Field also offers a host of smaller tips. As Field describes, flipping a class is a lot of work, and professors should take care to create materials in a way that makes them re-usable in later years. One tip I found particularly useful was that professors should use the same slide deck for the pre-class videos and the in-class portion of the course. However, the in-class portion should also include blank slides, which enable the students to work through additional problems in class. Using the same slides for both purposes can reduce confusion for the students and unnecessary work for the professor. Field also widely counsels that professors also should not hesitate to flip one unit at a time, to see how it works and what, if any, adjustments to make.
In short, Field’s article is a useful and inspirational synopsis of how she made the switch to flipped classrooms during the pandemic. I really appreciate Field sharing her process and journey. I believe that many professors will find the article useful as they continue to grow in their teaching practices.
