Volume 72, Issue 1
- "Tax Benefit Complexity and Take-Up: Lessons from the Earned Income Tax Credit"
by Jacob Goldin, Stanford Law School
Millions of low-income Americans fail to claim tax benefits for which they are eligible, possibly because the rules governing the benefits are extraordinarily complex. I consider efforts to increase tax benefit take-up in light of this complexity. A key fact is that the vast majority of tax filers today prepare their taxes with assisted preparation methods (APMs) like software or professional assistance. APMs eliminate some—but not all—of the barriers to claiming tax benefits for which one is eligible. With respect to claiming the Earned Income Tax Credit (EITC), I argue that most of the relevant complexity is the type that is eliminated by APMs. Consequently, efforts to increase EITC take-up should focus on inducing EITC-eligible individuals to file a tax return using an APM. In contrast, efforts aimed at increasing awareness of the credit (of the type widely employed by governments and nonprofits today) are less likely to be successful, except to the extent they themselves induce an increase in tax filing. Reforms that appear unrelated to a tax benefit may dramatically affect the benefit’s take-up by altering incentives to file a return. I develop these arguments in the context of the EITC, drawing on recent empirical work to support my claims.
- "Low-End Regressivity"
by Arielle Kleiman, University of San Diego School of Law
The earned income tax credit and the child tax credit lift millions of families out of poverty each year, and are found to increase employment and improve health and education outcomes among recipients. Supporters of these programs also ascribe them with reducing average tax burdens for low-income taxpayers and increasing the progressivity of the tax and fiscal system. Although these results are broadly true, expanding the analysis to include those disadvantaged by the programs’ design reveals a more complex story. This Article highlights how structural features of these tax benefits create a distribution of taxes and transfers that disadvantages childless workers and families in deep poverty relative to stably working families. As a result, relatively poorer taxpayers face higher average tax rates compared to better-off households, a phenomenon this Article defines as “low-end regressivity.” This Article argues that low-end regressivity subverts principal goals of progressive redistribution, reducing the system’s ability to maximize aggregate utility and to combat poverty and inequality. To make this claim, the Article identifies primary progressive goals of redistribution under both welfarist and nonwelfarist paradigms, and demonstrates how low-end regressivity undermines key objectives under diverse distributive justice frameworks. The Article then builds on this analysis by offering policy reforms that seek to reduce low-end regressivity—including eliminating the credits’ floors and phase-ins, and implementing state-level offsetting tax credits.
- "Tax Treaties and Developing Countries"
by Eric Zolt, UCLA School of Law
Academics and others over the last 50 years have called for developing countries to hesitate or refrain from entering into bilateral tax treaties with developed countries. Tax treaties seek to facilitate cross-border transactions and investments by reducing tax barriers and providing greater certainty to foreign investors. But treaty provisions invariably result in countries yielding taxing rights. Since at least the 1920s, treaties have arguably provided greater taxing rights to the country where the investors reside (generally, capital-exporting developed countries) rather than the country where the economic activity takes place (often, capital-importing developing countries). Where capital flows are roughly equal between countries, rules that skew taxing rights towards residence-based taxation away from source-based taxation result in little or no revenue shifting. But where capital flows are less even, the tax revenue consequences may be substantial.
Critics of tax treaties between developed and developing countries contend that developing countries give up tax revenue and receive little in return. But this common position rests on a questionable narrative. It assumes that tax treaties result in a transfer of revenue from developing to developed countries. For several reasons, tax revenue yielded by developing countries likely results in relatively little revenue gains by developed countries. In the current economic environment, tax treaties are less about distributive rules between countries and more about developed countries assisting their multinational entities in reducing their foreign tax liability and developing countries using tax treaties to attract foreign investment.
Framed this way, tax treaties share much in common with traditional tax incentives (such as tax holidays and favorable depreciation provisions). Viewing tax treaties as tax incentives changes the focus from whether the treaty provisions are fair to developing countries to whether this type of incentive generates economic benefits that justify the revenue costs.
For some, perhaps many, developing countries, tax treaties with developed countries make little economic sense. But for many other developing countries, this decision is more complex. It requires making country-specific and treaty-specific determinations of the revenue costs and economic benefits from entering into tax treaties with developed countries.
Volume 72, Issue 2
- "Collecting the Rent: The Global Battle to Capture MNE Profits"
co-authored by Joseph Bankman, Stanford Law School; Mitchell Kane, NYU School of Law; and Alan Sykes, Stanford Law School
Multinational enterprises (MNEs) often earn substantial profits, or "economic rents." Often, these MNEs are domiciled in the United States, and the rents derive from ownership of intellectual property. These MNEs have structured their affairs to pay little taxes to countries outside the United States or otherwise to share their rents in these countries. Apple and Microsoft, for example, may earn roughly half their profits outside the United States but do not pay significant amounts of taxes to any foreign country. The European Union and other countries have responded to this state of affairs with new tax legislation, antitrust actions, and other policies that have the effect of, and perhaps the intention of, capturing a greater share of MNE rents for their treasuries or citizens. To date, these policies are discussed in separate literatures focused on a particular policy domain (tax, antitrust, and so on). This paper offers the first unified or comparative analysis of the issue. We examine the various policy levers which a nation may employ to claw rents away from a non-resident MNE. We consider tax, anti-trust policy, state-owned enterprises, price regulation, tariffs and other types of trade policies. We discuss the relative merits of each policy, including their economic welfare consequences (nationally and globally) and their effects on the distribution of rents. We also consider the circumstances in which one policy is likely to be superior to others from a national or global perspective.
- "The Death and Life of the State and Local Tax Deduction"
by Daniel Hemel, University of Chicago Law School
The new $10,000 cap on the deduction for state and local taxes (SALT) has proven to be one of the most controversial aspects of the December 2017 federal tax law. Four states have sued the Trump administration alleging that the cap is unconstitutional. Those four states and several others have moved to establish arrangements that mitigate the deduction’s impact on their residents. The Treasury Department and the Internal Revenue Service have published proposed regulations that seek to stop those states in their tracks. Battles over the deduction and the state workarounds will likely move to the courts in the coming months.
Viewed from one angle, the December 2017 tax law strikes the most serious blow to the SALT deduction in the century-and-a-half since the provision first emerged. Yet the new $10,000 cap also has the potential to give the SALT deduction new life. One state, New York, has responded to the $10,000 cap by adopting a payroll tax arrangement that could extend the SALT deduction to workers who never claimed it before. And the intensely partisan attack on the SALT deduction from the right has managed to transform the provision into a cause célèbre among progressive activists and politicians, making it all the more likely that the deduction will be revived if Democrats retake control of Congress and the White House.
This article considers SALT’s history and its future. It casts the recent rollback of SALT as the culmination of a seven-decade trend of successive SALT limitations, which even before 2017 had put the deduction effectively out of reach for more than two-thirds of the taxpaying public. It then evaluates the normative arguments against the deduction and in favor. The article goes on to examine the strategies that states are pursuing to ensure that their residents can pay for public goods and services with federally deductible dollars. Some of these strategies stand a strong chance of succeeding; others will likely flounder. What the ongoing SALT battles most certainly have done is to mobilize a constituency in support of a provision that, just a few years ago, looked like it had few friends. Ironically, the attack on the SALT deduction as part of the partisan December 2017 tax law might well have saved the provision from the dustbin of tax history.
- "Taxation and Democracy"
by Wolfgang Schön, Max Planck Institute for Tax Law and Public Finance (Munich)
Political economy assumes that taxation and democracy interact beneficially when there exists “congruence” or “equivalence” among those who vote on the tax, those who pay the tax, and those who benefit from the tax. Yet this only holds true when we look at the community of taxpayers as an aggregate, not at the position of the individual taxpayer. Individuals might regard democratic decision-making as a tool for the majority to exploit the minority. They might also perceive powerful special interest groups to extract preferential tax treatment to the detriment of other constituencies.
In the international situation, the notion of “congruence” or “equivalence” comes under additional strain. Why do most countries allow citizens abroad to vote without being subject to tax while resident aliens are subject to tax without the right to vote? In recent years, tax competition has exerted even more pressure on democratic discourse: Is the “exit” option for individuals a source of irritation for democratic tax legislation or is it rather a useful device to protect the individual against being overtaxed? To what extent shall outside investors take into account the redistributive policies of States? These issues do not only challenge the traditional balance of taxation and democracy. They also challenge our views on how we perceive the State and how we define the community of taxpayers as agents of social justice. In tax law, the borderline between “us” and “them” has to be addressed as unlimited tax liability involves a notion of solidarity that is hard to capture in a globalized world.
Against this background, this article explores the constitutional framework of taxation and democracy in a comparative fashion. It presents two major pathways for the protection of the individual in fiscal matters: protection by “content” (material tax principles) and protection by “consent” (voting rights) as they have evolved since the days of Hobbes and Locke. While the United Kingdom and the United States largely rely on the protective value of democratic consent, countries in Europe and in Latin America have resorted to hard-wired constitutional constraints on tax legislation, ensuring a high-degree of judicial review by constitutional courts. This constitutional framework comes under increased pressure once a country opens itself to the globalized world. It remains to be seen to what extent material principles – like the principle of equality – are in the position to restrain a country’s engagement in international tax competition.
Volume 73, Issue 1
- "Should the IRS Know Your Race? The Challenge of Colorblind Tax Data"
by Jeremy Bearer-Friend, George Washington University Law School
This Article draws from original archival sources to document a century of colorblindness in federal tax data. It traces the omission of race and ethnicity from IRS statistical publications since 1913, Joint Committee on Taxation publications since 1926, and Treasury Office of Tax Analysis publications since 1974. It shows how these omissions are exceptional relative to other areas of public policy where federal data on race and ethnicity are readily available, such as student achievement or healthcare exchange enrollments. It then evaluates the merits of colorblind tax data and argues that tax data should include race and ethnicity in order to meet goals of transparency, democracy, and equality. Colorblind tax data obscure racial inequality and prevent its remedy. Colorblind tax data also undermine the democratic accountability of tax policy. In fairness to the status quo practice of colorblindness by federal tax data institutions, this Article also considers whether the possible justifications for colorblind tax data should override principles of equality and transparency. It argues they should not. This Article concludes by proposing a variety of alternatives to the current colorblind tax data regime that do not require adding questions about race or ethnicity to Form 1040.
- "Sharp Lines and Sliding Scales in Tax Law"
by Edward Fox, University of Michigan Law School, and Jacob Goldin, Stanford Law School
Abstract:The law is full of sharp lines, where small changes in one’s circumstances lead to significant changes in legal treatment. In many cases, a sharp line can be smoothed out by replacing it with a sliding scale. Under a sliding scale, small changes in one’s circumstances lead to small changes in legal treatment. In this paper, we study the policy choice between sharp lines and sliding scales in tax law. We focus on considerations relating to efficiency, complexity, administration, tax planning, and the objectives of specific provisions. Although sharp lines are currently widespread in tax law, we argue that sliding scales are often feasible in practice and can often better serve a variety of tax policy goals. We illustrate our claims with examples drawn from diverse areas of tax law.
- Earnings Stripping Under the BEAT
by Chris William Sanchirico, University of Pennsylvania Law School
Abstract:The Base Erosion and Anti-Abuse Tax is generally regarded as among the most important changes wrought by the Tax Cuts and Jobs Act of 2017, which is itself regarded as among the most important pieces of tax legislation in the last several decades. This paper evaluates the new BEAT provision along with recently proposed regulations. The analysis makes several points about the nature of earnings stripping, the interaction of the BEAT with the new limitation on deducting business interest, the treatment of costs of goods sold under the BEAT, and the BEAT’s approach to depreciable and amortizable property whether purchased, leased or licensed.
Volume 73, Issue 2
- "The Digital Services Tax: A Conceptual Defense"
by Wei Cui, University of British Columbia
Since 2018, the UK government, the European Commission, and several European national governments have advanced bold proposals for a new “digital services tax” (DST), with the aim of capturing profits earned by multinationals that reflect value contributed by users of digital platforms. I offer a novel set of arguments in support of the DST, which appeal to both efficiency and fairness considerations.In particular, the DST would allow location-specific rent (LSR) earned by digital platforms to be captured by the countries in which such rent arises. I argue that platform LSR is often hidden from view under the traditional international income taxation paradigm, due to that paradigm’s focus on physical presence, source of payment, and profit allocation among related entities. Moreover, that paradigm ignores a basic intuition about how rent accruing to mobile intangible assets should be assigned: when the deployment of a technology is non-rival with respect to multiple locations, it is both efficient and fair to assign any rent earned from the technology’s deployment with respect to a given location to that location.
The principle of taxing platform rent where it arises is both distinct from and superior to the principle of allocating profit to “destination” (i.e. buyer or consumer) jurisdictions. Platform rent can arise in origin, destination, or residence jurisdictions, and the location of “user value creation” is not reducible to consumer location. Moreover, claims to taxing rights based on the location of rent inherently appeals to equity considerations, whereas destination-based apportionment generally ignores equity issues in allocation. I discuss misunderstandings of DST proposals, and reject certain common assertions about the DST’s likely effects, including that DST costs will simply be passed on domestic consumers or producers, and that a revenue-based tax is inherently flawed. Finally, I suggest that the potential of the DST to reduce excessive entry in platform markets also deserves further consideration.
- "Allocating Tax Transition Risk"
by Heather M. Field, University of California, Hastings College of the Law
- "Employer Losses and Deferred Compensation"
by David I. Walker, Boston University School of Law
Most large public companies offer their executives the opportunity to defer the receipt and taxation of a portion of their salary or other current compensation until retirement or some other future date, and equity compensation, which also entails deferral of pay and taxation, constitutes a large fraction of the typical executive pay package. Conventional wisdom holds that employer net operating losses (NOLs) improve the joint economics of deferred and equity compensation (henceforth together “deferred compensation”) for the parties. However, empirical studies provide little evidence of an association between employer NOLs and deferred compensation use. This paper focuses on two potential explanations for this apparent disconnect. First, this paper shows that the relationship between employer NOLs and the attractiveness of deferred compensation is more complex and less predictable than is generally recognized, that a larger NOL position does not necessarily produce a larger driving force for use of deferred compensation, and that in some cases employer NOLs can actually result in poorer deferred compensation economics. As a result, some employers and executives may rationally choose to ignore employer NOLs when making compensation decisions. Second, even if companies are sensitive to the existence of employer NOLs when making compensation decisions, it is not clear that research methods currently in use would detect the sensitivity. The commonly used proxies and simulations of employer effective marginal tax rates that have been employed in these studies may not adequately capture the complexity of the relationship between NOLs and the economics of deferred compensation.