IU Tax Policy Colloquium: Hayashi, “Countercyclical Tax Bases”

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Prof. Andrew Hayashi

By: Leandra Lederman

On April 5, Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Andrew Hayashi from the University of Virginia School of Law. Andrew presented his fascinating new paper, “Countercyclical Tax Bases.” (The paper isn’t publicly available yet, but Andrew offered to share it by email with interested readers.)

The paper argues that the choice of tax base should take into account what tax base is most helpful to the economy in recessions. It points out that recessions are not rare; between 1980 and 2010, there were 5 recessions, covering 16% of that period. The paper does two main things. First, it provides interesting stylized examples showing how, following an economic shock that reduces income or housing value, three types of tax bases (income, sales, and property) each interact with household credit constraints and adjustment costs (committed consumption of housing) to either stabilize or aggravate the negative economic shock. These examples illustrate quantitatively how different tax bases can affect taxpayer behavior in a recession, and thus the local economy.

Second, the paper contains an original empirical study of county tax bases for 2007-2014, to see the effect of tax bases on the recessions of 2001 and the Great Recession of 2008-2009. Andrew combined data from the Government Finance Database, Zillow, the FBI’s Uniform Crime Reports, and the IRS’s Statistics of Income, among other places. Although the results for the two recessions were not identical, Andrew generally found in his OLS regressions that counties that relied more on property taxes had smaller increases in unemployment during the two recessions and may have recovered from the recession more quickly. Sales taxes generally had countercyclical effects, as well, particularly in stabilizing government revenues during the Great Recession. In general, counties that were most reliant on income taxes suffered the most in the two recessions (though the results for income taxes generally were not statistically significant). Continue reading “IU Tax Policy Colloquium: Hayashi, “Countercyclical Tax Bases””

The IU Maurer Law School’s 2019 Tax Policy Colloquium

By Leandra Ledermancolloquium2019poster

Indiana University Maurer School of Law’s 2019 Tax Policy Colloquium will kick off on Thursday, January 17. My colleague David Gamage is hosting the Colloquium this year, and I’m really excited to hear from the terrific line-up of speakers! Andrew Hayashi from Viriginia Law School will kick off the semester with his work in progress, Countercyclical Tax Bases. 

As I explained last year, The Tax Policy Colloquium is a course for students that features a series of speakers. The structure involves a background session with the students in alternate weeks, to help them get up to speed on the concepts presented in the paper draft. The workshops are open to the law school community and interested guests. They are usually attended not only by the students in the course but also by me, David Gamage, senior tax attorney/Maurer alumnus Tim Riffle, and a few other faculty, typically law school colleagues and/or tax or economics faculty from other schools on campus. We also invite other attorneys practicing in Bloomington and Indianapolis, tax Continue reading “The IU Maurer Law School’s 2019 Tax Policy Colloquium”

Section 199A’s Workplace Shift

By Diane Ring

As we mark the one year anniversary of tax reform, the aftermath continues to dominate tax policy analysis. New § 199A, which my co-author, Shu-Yi Oei, and I initially explored here and here and here, continues to attract significant attention, both in terms of the provision’s likely substantive effects, and the legislative, regulatory, and political issues it raises.

One of the most compelling, yet underanalyzed, questions is how § 199A could impact labor and dramatically reshape work, the workforce, and the workplace. In a new paper posted on SSRN on December 3, titled “Tax Law’s Workplace Shift,“ Shu-Yi and I tackle these issues in detail. In brief, the paper explores the factors that will determine whether § 199A is likely to cause a workplace shift from employee to independent contractor arrangements, and, if it does, how such a shift should be normatively evaluated. Ultimately, we show how our evaluation of these § 199A workplace effects must depend on the types of workers and work at issue. Continue reading “Section 199A’s Workplace Shift”

Tax Evasion and the Fraud Diamond

By: Leandra LedermanFraud Diamond image

There is an extensive set of literatures on tax compliance and evasion, often discussing the traditional economic model (the deterrence model) and/or behavioral theories such as social norms or tax morale. (For recent examples summarizing the theories, see this article by Kathleen Delaney Thomas, this one by Adam Thimmesch, or this one by yours truly.) There is also a separate accounting literature on fraud.

A key concept in this accounting literature is the “Fraud Triangle.” Yet despite the important role this theory plays within the accounting literature, the Fraud Triangle does not seem to have permeated the tax compliance literature, particularly the relevant legal literature.

For example, a search in “Secondary Materials” in Lexis for “‘fraud triangle’ w/50 tax!” turns up only one article, which is not a tax article but does cite a 2006 Tax Notes article authored by three CPAs. That article is James A. Tackett et al., “A Criminological Perspective of Tax Evasion” (paywalled). Yet, the Fraud Triangle should not be overlooked by scholars outside of accounting. It provides a powerful tool with which to conceptualize tax evasion. And, as discussed below, it helps provide a framework that both supports the deterrence model and allows other factors to coexist with deterrence.

The Fraud Triangle and the Fraud Diamond

The Fraud Triangle derives from three factors that criminologist Donald R. Cressey originally identified in a 1951 article in the Journal of Accountancy, “Why Do Trusted Persons Commit Fraud?: A Social-Psychological Study of Defalcators.” As discussed in his 1951 article and his 1953 book, “Other People’s Money: A Study in the Social Psychology of Embezzlement,” Cressey developed the factors that became the Fraud Triangle out of in-depth interviews with inmates who had been convicted of trust violations such as embezzlement. The three factors were labelled the “fraud triangle” by Steve Albrecht in the early 1990s. The elements of the Fraud Triangle, as discussed by Albrecht and others, are “perceived pressure” (usually financial), “perceived opportunity” to commit the fraud, and “rationalization” that the actions are justifiable or appropriate in the context of the situation. Albrecht and his coauthors of a 1979 KPMG study of convicted perpetrators of fraud “found that the decision to commit fraud is determined by the interaction of all three forces.” Continue reading “Tax Evasion and the Fraud Diamond”

The § 199A Regulations: Looking Toward Finalization

By: Leigh Osofsky
Professor of Law, UNC School of Law

As the holiday season approaches, tax practitioners and commentators are waiting for the arrival of a much-anticipated event: the finalization of the § 199A regulations. The Treasury Department has indicated that it is trying to finalize the regulations before the end of the year or shortly thereafter. Treasury has moved expeditiously with this monumental regulatory project for good reason: with the New Year comes the first tax filing season that will require application of § 199A (though those filing estimated returns may have already tried to apply the section). While the proposed regulations indicate that taxpayers may rely on the proposed regulations until the date that the final regulations are published in the Federal Register, it is nonetheless beneficial to have a bit more certainty regarding the operation of the provision as soon as possible going into filing season.

So, what can we expect of the final regulations? Much of what we saw in the proposed regulations – the basic regulatory approach – will likely stay the same. As Shuyi Oei and I catalogued in a recent article, Beyond Notice-and-Comment: The Making of the § 199A Regulations, Treasury put significant work into formulating the proposed regulations. Treasury engaged in extensive dialogue with interested constituencies prior to the release of the proposed regulations in addition to going through OIRA review. The proposed regulations offer a lengthy and detailed presentation of why Treasury chose particular approaches such as, for instance, a narrow reading of the critical “reputation or skill” clause from the statute. These types of fundamental decisions from the proposed regulations are thus unlikely to radically change.

This is not to say there will be no changes at all in the final regulations. Treasury has signaled it may make some changes to parts of the aggregation rules. And S Corp banks lobbied extensively both as part of the notice-and-comment period and outside of it to increase the de minimis threshold for the specified service trade or business (“SSTB”) characterization. If their lobbying effort is successful, the threshold will go up in the final regulations and allow more S Corp banks and similarly situated businesses to avoid classification in the undesirable SSTB category. This would be a real win for such banks, especially given that the statute itself does not explicitly provide for a de minimis exclusion from the SSTB category. Many other taxpayers pleaded for greater clarity, and, in particular, clearer exclusion from SSTB categorization, including in a slew of requests made as part of the notice-and-comment process. Shuyi Oei and I documented much of this dynamic in our recent work. However, Treasury is unlikely to grant the certainty requested by all, as the taxpayers making the requests are surely aware.

So, who will get a present in finalization and who will get a lump of coal? We will all find out soon enough. But my money is on few major changes and a lot of little ones around the edges.

Tax Panels at the 2019 AALS Annual Meeting

By: Shu-Yi Oei

The Association of American Law Schools will be holding the 2019 AALS Annual Meeting in New Orleans, LA from January 2-6, 2019. This year, I’m the chair of the AALS Tax Section. Your section officers (Heather Field, Erin Scharff, Kathleen Thomas, Larry Zelenak, Shu-Yi Oei)  are pleased to bring you four tax-related panels at the Annual Meeting. Two are Tax Section main programs, and two are programs we are cosponsoring with other sections. Details below.

We’re also organizing a dinner for Taxprofs (and friends) on Saturday, January 5. If you’re on the distribution list, you should have received an email about that and how to RSVP. If you’d like more details, please email me.

We hope to see many of you at the Annual Meeting!

Tax Section Main Program:  The 2017 Tax Changes, One Year Later (co-sponsored with Legislation & Law of the Political Process, and Trusts and Estates)
Saturday, January 5, 2019, 10:30 am – 12:15 pm

Moderator:
Shu-Yi Oei, Boston College Law School
Speakers:
Karen C. Burke, University of Florida Fredric G. Levin College of Law
Ajay K. Mehrotra, Northwestern University Pritzker School of Law
Leigh Osofsky, University of North Carolina School of Law
Daniel N. Shaviro, New York University School of Law
Program Description: Congress passed H.R. 1, a major piece of tax legislation, at the end of 2017. The new law made important changes to the individual, business, and cross-border business taxation. This panel will discuss the changes and the issues and questions that have arisen with respect to the new legislation over the past year. Panelists will address several topics, including international tax reform, choice-of-entity, the new qualified business income deduction (§ 199A), federal-state dynamics, budgetary and distributional impacts, the state of regulatory guidance, technical corrections and interpretive issues, and the possibility of follow-on legislation.

Business meeting at program conclusion.

New Voices in Tax Policy and Public Finance (cosponsored with Nonprofit and Philanthropy Law and Employee Benefits and Executive Compensation)
Saturday, January 5, 2019, 3:30-5:15 pm

Paper Presenters:
Ariel Jurow Kleiman (University of San Diego School of Law), Tax Limits and Public Control
Natalya Shnitser (Boston College Law School), Are Two Employers Better Than One? An Empirical Assessment of Multiple Employer Retirement Plans
Gladriel Shobe (BYU J. Reuben Clark Law School), Economic Segregation, Tax Reform, and the Local Tax Deduction
Commenters:
Heather Field (UC Hastings College of the Law)
David Gamage (Maurer School of Law, Indiana University at Bloomington)
Andy Grewal (University of Iowa College of Law)
Leo Martinez (UC Hastings College of the Law)
Peter Wiedenbeck (Washington University in St. Louis School of Law)
Program Description:
This program showcases works-in-progress by scholars with seven or fewer years of teaching experience doing research in tax policy, public finance, and related fields. These works-in-progress were selected from a call for papers. Commentators working in related areas will provide feedback on these papers. Abstracts of the papers to be presented will be available at the session. For the full papers, please email the panel moderator.

Continue reading “Tax Panels at the 2019 AALS Annual Meeting”

Evelyn Brody in the Gallery

By Sam Brunson

Evelyn Brody with her painting “When in French”

Have you ever wondered what tax professors do when they’re not doing tax? In the case of Evelyn Brody (Chicago-Kent College of Law), one answer is art.

I’m sure most people who read this blog are familiar with Evelyn’s academic work, but if you’re not, she teaches and writes broadly in the income tax and nonprofit law areas. She also paints.

And when I say paints,” I mean it. Almost two weeks ago, she opened “Suspended Animation,” an exhibition of her pastels at the Leslie Wolfe Gallery. This afternoon I went to the reception she hosted at the gallery. Continue reading “Evelyn Brody in the Gallery”

Coming Soon: Trump’s Tax Returns (or Maybe Not)

By Sam Brunson

As we’re all acutely aware, in his presidential campaign, Donald Trump flouted decades of history by refusing to release his tax returns. And given that (a) the history was based on norms, not law, and (b) the Republican-controlled Congress did nothing to enforce the norms (or transform them into law), he continued to flout that norm throughout the first two years of his presidency.

But on January 3, 2019, Democrats will gain control of the House. And Democratic Representatives have made pretty clear that one of their first agenda items will be to request Trump’s tax returns. So does that mean we’ll finally get access to his tax returns?

Maybe. (But probably not.) Continue reading “Coming Soon: Trump’s Tax Returns (or Maybe Not)”

Wesley Snipes and His Offer-in-Compromise

By Sam Brunson

By nicolas genin from Paris, France [CC BY-SA 2.0], via Wikimedia Commons
You may remember about a decade ago, when Wesley Snipes was sentenced to three years in prison for willfully failing to file tax returns. During his sentencing, Snipes apologized for his “mistakes and errors,” and promised that “[t]his will never happen again.”

He did not, however, mention taxes in his apology. And apparently, the “this” that he promised would never happen again was not failing to pay his taxes.

Yesterday, the Tax Court issued an opinion holding that the IRS did not abuse its discretion in denying Snipes’s offer-in-compromise. Continue reading “Wesley Snipes and His Offer-in-Compromise”

Increased Transparency in the U.S. Tax Court: Has the Moment Arrived?

By: Leandra LedermanCaptureDocketInquiry1

Transparency is a widely accepted judicial norm. It increases courts’ accountability and thereby increases the confidence and trust litigants and the general public have in courts’ decisionmaking. The comparatively limited access afforded to Tax Court documents is a longstanding issue. The reason Tax Court transparency differs from that of other courts is partly structural, in that the Tax Court isn’t as neatly situated in the federal government’s org chart as Article III courts, administrative agencies, or even Article I courts such as the Court of Federal Claims. (In fact, even which branch of government the Tax Court is located in has presented a puzzle.) Accordingly, the Tax Court traditionally has created many of its own rules and procedures, such as ones governing access to its documents. This means that the question is also partly cultural. As discussed below, access to Tax Court documents has increased over time, and the appointment of several new Tax Court judges may mean that we see further changes in the future.

In the past, the Tax Court’s more limited transparency has sometimes violated judicial norms and has sometimes created access inequities. For example, although the Tax Court is required by statute to make its reports and evidence “public records open to the inspection of the public,” for years the Tax Court kept its Summary Opinions confidential, which I protested in 1998 in a short Tax Notes article called “Tax Court S Cases: Does the ‘S’ Stand For Secret?”.  Although Summary Opinions lack precedential value, they are Tax Court opinions, revealing how the judge deciding the case (typically a Special Trial Judge) thinks about the issues. The Tax Court’s practice of sharing those opinions only with the parties to the case meant that the IRS had a copy of every Summary Opinion but taxpayers typically could not access the opinions in other Small Tax Cases (S cases). This created an uneven playing field. Secrecy can also lead to suspicion of favoritism or other inequities, concerns that existed in an analogous situation, in the era when the IRS did not make Private Letter Rulings (PLRs) public but large firms collected them. Litigation challenging this lack of transparency resulted in legislation, requiring PLRs to be disclosed (with taxpayer information redacted). Continue reading “Increased Transparency in the U.S. Tax Court: Has the Moment Arrived?”