William W. Oliver Professor of Tax Law at Indiana University Maurer School of Law in Bloomington. Find my research at http://ssrn.com/author=48125 and my full publication list at http://www.law.indiana.edu/people/lederman/publications.shtml. I teach Income Tax, Corporate Tax, Tax Procedure, and Tax Policy Colloquium. I generally write about tax compliance and tax administration, the U.S. Tax Court, and the federal income tax as it applies to individuals and corporations. I'm on Twitter at https://twitter.com/leandra2848; come for the law and policy tweets, stay for the #taxvalentines!
Tax losses pose a special problem for the federal fisc. I’ll get to that in a minute, but first some set-up as to how tax noncompliance differs on the income side versus the deduction and credit side. The overall purposes of this post are to address some questions I’ve gotten and pull together some tax enforcement themes that are implicated by the recent NY Times reporting on Pres. Trump’s returns.
The Importance of Third-Party Reporting
A lot of tax noncompliance occurs with respect to income. Not for folks with mainly wage and salary income who maybe earn a little bit of interest from a bank account. All of that is reported by third parties (the payors) to the IRS, on information returns like Form W-2 or Form 1099. The taxpayer/payee receives a copy the information return and that both simplifies reporting and communicates what information the IRS has about the transaction. As Joe Dugan and I argue in a forthcoming article, third-party reporting is very effective. With the IRS able to do simple return matching to catch any incorrect reporting (intentional or otherwise), IRS figures like this bar graph show that there’s not a lot of noncompliance where there’s substantial third-party information reporting.
Where much tax noncompliance occurs is with respect to income earned by the self-employed and small businesses, where there’s much less third-party reporting and also more use of untraceable cash. (I added the red circle to the IRS image below.)
I was inspired last night while watching the debate to write some limericks about President Trump’s tax returns. I’m sharing them here to collecting them in one place. It would be great to see others add to the collection, too–there may not be as much love as on #TaxValentines Day–but #TaxLimericks could be a broader genre!
The 2020 Indiana/Leeds Summer Tax Workshop Series ended on Thursday, after 13 weeks of talks. It was terrific getting to spend the summer with so many tax enthusiasts–professors, practitioners, and students–from all over the world! Dr. Leopoldo Parada and I really enjoyed co-hosting this series, and we expect to continue it next summer!
We received speaker permission to share videos of most of the talks. The speaker’s scripted remarks and our introductions are included. Those videos can be found at this link.
The complete speaker list and papers presented were as follows:
Ruth Mason, University of Virginia
The Transformation of International Tax
Stephen Daly, King’s College London
Trust, Tax Administration and State Aid
Susan Morse, University of Texas
Modern Custom in Tax
James Repetti, Boston College
The Appropriate Roles for Equity and Efficiency in a Progressive Income Tax
Diane Ring & Shuyi Oei, Boston College
Regulating in Pandemic: Evaluating Economic and Financial Policy Responses to the Coronavirus Crisis
Umut Turksen, Coventry University
The Role of Human Factors in Tax Compliance and Countering Tax Crimes
Allison Christians, McGill University
Accurately Counting Value in the International Tax System
Joshua Blank, University of California, Irvine
Automated Legal Guidance
Michael Devereux, University of Oxford
The OECD GloBE Proposal
Ana Paula Dourado, University of Lisbon
The Concept of Digital Economy for Tax Purposes: a Reassessment
Ricardo García Antón, Tilburg University
Enhancing the Group Interest in Transfer Pricing Analysis
Steven Dean, New York University
A Constitutional Moment in Cross-Border Taxation
Monica Victor, University of Florida
The Taxman’s Guide to the Galaxy: Allocating Taxing Rights in the Space-based Economy
Thank you again to all those who joined us, and we hope to see you next year! #IndianaLeedsSummerTax
Susan Morse and Stephen Shay have blogged on Procedurally Taxing on both May 22 and June 11 on Altera’s efforts to have the U.S. Supreme Court grant certiorari in Altera v. Commissioner. Altera is a closely followed case involving an administrative law challenge to the validity of a Treasury regulation, so I wanted to flag those blog posts for Surly Subgroup readers.
Recall that in Altera, the Court of Appeals for the Ninth Circuit upheld a cost-sharing regulation under IRC § 482, reversing the Tax Court’s unanimous decision invalidating the regulation as arbitrary and capricious. The Ninth Circuit ruled 2-1 for the government in both its original opinion, which was withdrawn due to the death of one of the judges on the panel, and again in a revised opinion. The Ninth Circuit also denied rehearing en banc, a victory for the IRS’s rulemaking process. (Full disclosure: in addition to joining in two earlier amicus briefs in favor of the Commissioner, which Susie and Steve spearheaded, I co-authored with them and Clint Wallace a 2019 amicus Brief in Opposition to the Petition for Rehearing En Banc.)
The Call for Papers opens today and will close on May 10, 2020 at midnight British Summer Time (7pm Eastern Daylight Time). If you are interested in presenting in the Workshop, please send the following before then to email@example.com and L.Parada@leeds.ac.uk:
Your name, title, and affiliation.
The paper title and an Abstract of no more than 1,000 words.
Whether or not you already have a draft of the paper. (We expect to circulate a draft of each paper—at least 10 pages—a week in advance of each talk.)
Whether or not the paper has been accepted for publication.
A list of any Thursdays between May 28 and August 6 that you would not be available to present, or a statement that any Thursday in that date range would work for you.
The Tax Policy Colloquium at Indiana University Maurer School of Law, which I’ve been blogging about, ran in person in Bloomington until our Spring Break. The fourth talk of the semester was given by Prof. Orly Mazur of SMU Dedman School of Law on March 5, 2020. She presented her interesting law-and-technology paper titled “Can Blockchain Revolutionize Tax Compliance?” (In general, she argued that it can’t: blockchain is unlikely to dramatically change tax enforcement by, for example, replacing third-party information reporting.)
The subsequent IU Tax Policy Colloquium talk, by Prof. Rita de la Feria of the University of Leeds School of Law, was on March 27. She presented a paper, coauthored with Michael Walpole of UNSW, titled “The Impact of Public Perceptions on VAT Rates Policy,” which is part of a larger project proposing a progressive VAT. The paper argues that, although having a single consumption tax rate that is broadly applied is most equitable, there typically are numerous exemptions and/or lower rates, for political economy reasons.
With the move to online classes due to the pandemic, this talk occurred via Zoom. It was unfortunate that, due to the pandemic, we were not able to host Rita in Bloomington. However, the silver lining was that I was able to invite tax experts and other faculty from all over the world to attend. Rita and I also both publicized the talk on social media. As a result, several academics and other tax experts either asked to attend, or, if they saw the notice too late, asked if there is a video they could watch, which there is. In addition to me, Rita, and the students in the class, there were 22 attendees, which produced a terrific discussion. The students later told me how wonderful it was to have so many international tax experts asking questions and making comments. Continue reading “Virtual Tax Policy Colloquia”→
On February 20, 2020, the Indiana University Maurer School of Law welcomed our third Tax Policy Colloquium guest of the year: Prof. Zachary Liscow from Yale Law School. Zach presented his draft article titled “Equality, Taxation, and Law and Economics In the 21st Century.”
As its title suggests, the article takes on income inequality. The article argues that the standard approach of redistributing only through the tax system and hinging non-tax policies on efficiency is misguided. It makes the case that (1) people want more equality than we currently have; (2) people do not think of tax and transfers together and fungibly trade off between types of redistribution but instead have (conceptually) “separate public accounts” for taxation and other government activities; (3) in part, that is because people have an idea of “desert” that is linked to cash income, resulting in resistance to heavily redistributionist taxation; and thus (4) rather than striving for “optimal” taxation and efficient legal rules, the government should tilt non-tax policies (such as transportation policy) to increase their redistributive aspects. As the abstract states, this argument “turns standard economics prescriptions on their heads.”
On February 6, 2020, the Indiana University Maurer School of Law welcomed our second Tax Policy Colloquium guest of the year: Prof. Werner Haslehner from the University of Luxembourg’s Department of Law, who is currently a Global Research Fellow and adjunct professor at NYU Law School. Werner presented his draft essay titled “International Tax Competition—the Good, the Bad, and the Ugly.”
States of course compete for tax base. Werner’s essay explains that “States’ general freedom to act (which we may call sovereignty) and taxpayer’s freedom to choose (which we may call liberty) – although neither is without limits – inescapably lead to competitive pressures and reactions.” (p.4) And some of this competition has been labelled as “harmful” by the OECD, the European Commission, and others. Yet, the essay points out, there is no accepted definition of the phrase “harmful tax competition.” The essay briefly reviews the literature and points out differences in approach to defining this concept. This part of the essay draws in part on Lily Faulhaber’s compelling article, The Trouble with Tax Competition: From Practice to Theory, 71 Tax L. Rev. 311 (2018), which pointed out the lack of definitional consensus and offered a typology of tax competition.
Werner’s essay further argues that, as commonly understood, there is no economic standard that supports a distinction between “harmful” and other types of tax competition. The essay thus proposes to replace the phrase “harmful tax competition” with “unfair tax competition.” (p.13) The essay specifically proposes “to refer as a basis for such a constraint to one of the most salient principles of moral philosophy: Immanuel Kant’s categorical imperative. According to this norm’s first formulation, one is to ‘act only in accordance with that maxim through which one can at the same time will that it become a universal law’.” (p.16). The essay provides two examples of behaviors that would be considered “unfair” under this standard: (1) ring-fencing (the provision of a tax benefit only to foreigners, not domestic taxpayers) and (2) secrecy (which, in response to a question I posed, Werner clarified refers to “secrecy as a service”—assisting foreign taxpayers in tax evasion). Continue reading “IU Tax Policy Colloquium: Haslehner, “International Tax Competition—The Good, the Bad, and the Ugly””→
On January 23, the Indiana University Maurer School of Law welcomed our first Tax Policy Colloquium guest of the year: Prof. Michelle Layser from the University of Illinois College of Law. She presented her draft paper on the design of place-based tax incentives, then called “When, Where, And How To Design Community-Oriented Place-Based Tax Incentives,” and since retitled “How Place-Based Tax Incentives Can Reduce Geographic Inequality.” An updated draft is available on SSRN.
Shelly explained that this draft is the second paper in a multi-part project she is conducting on place-based tax incentives. Last year, she published the first piece in the series, “A Typology of Place-Based Investment Tax Incentives,” 25 Wash. & Lee J. Civ. Rights & Soc. Just. 403 (2019). Place-based tax incentives are geography-based incentives that generally are intended to help low-income areas by fostering investment in those areas. The 2019 article distinguished among place-based tax incentives on two dimensions: direct and indirect tax subsidies and spatially-oriented versus community-oriented incentives. “Direct tax subsidies provide tax breaks directly to businesses that invest in low-income communities.” (p. 415) Indirect tax subsidies are instead provided to investors in such business (pp. 417-18). She cites as examples the New Markets Tax Credit (NMTC) of IRC § 45D and the Opportunity Zones (OZ) provisions in IRC § 1400Z-1 et seq. (The OZ provisions are the most oddly numbered Internal Revenue Code sections I’ve ever seen!). Spatially-oriented tax incentives focus on specific geographically-defined Continue reading “IU Tax Policy Colloquium: Layser, “When, Where, And How To Design Community-Oriented Place-Based Tax Incentives””→
Indiana University Maurer School of Law’s Tax Policy Colloquium will reconvene this Thursday, January 23, 2020. Michelle Layser from the University of Illinois College of Law will start us off, presenting her new paper titled “When, Where, and How to Design Community Oriented Place-Based Tax Incentives.” It’s a really interesting study of tax-expenditure design in the context of geography-based tax incentives. Prof. Layser’s paper includes original “heat maps” of Chicago showing areas with high poverty levels, areas with high numbers of low-wage jobs, areas that are eligible for the New Markets Tax Credit, and areas designated as Opportunity Zones. The talk promises to be really interesting!
The full schedule of talks is listed below, after the jump, and is also shown in the poster pictured above. Overall, this year’s line-up of speakers is more international than usual, following my wonderful Fulbright research stay at the University of Luxembourg in Spring 2019.
As I did the last time I ran the Colloquium, I’m planning to blog each workshop afterwards, with permission of the speakers. If you will be in Bloomington and are interested in attending one or more workshops, just let me know and I can add you to the email list or send you a particular paper once I receive it. (Most of the paper drafts will not be publicly available.) Continue reading “The IU Maurer Law School’s 2020 Tax Policy Colloquium”→
The Indiana University (IU) Maurer Law School’s Indiana Journal of Law and Social Equality, in collaboration with IU’s Kelley School of Business and IU’s Ostrom Workshop, is hosting a symposium on the “gig” or “sharing” economy on February 13 and 14, 2020 at the Maurer School of Law in Bloomington, Indiana. The call for participation can be found here. The deadline for full consideration is November 27, 2019 at 5pm.
The Indiana Journal of Law and Social Equality serves as an academic forum for scholars, practitioners, policymakers, and students to improve race and gender relations, foster new research in and across the disciplines, and provide an intellectual foundation for the pursuit of social justice.
The Kelley School of Business is consistently named among the top business schools in the world and is home to the Department of Business Law and Ethics, one of the largest and most well-respected departments of its kind. The Department continues Kelley’s strong business law tradition and advances research in a variety of business law fields, especially privacy, big data, and cybersecurity.
The Ostrom Workshop was founded at Indiana University in 1973 by Nobel laureate Elinor Ostrom and her husband, Vincent. Today, it carries forward their legacy by seeking and sharing solutions to the world’s most pressing problems involving communal and contested resources—from clean water to secure cyberspace.
Yesterday, the IRS released new federal tax gap estimates, including a new Tax Gap Map. My first substantive post on this blog, back in May 2016 (linked here), was on the IRS’s tax gap study for the 2008-2010 tax years. The new report covers averages from tax years 2011-2013, i.e., picking up where the 2016 report left off.
The new estimates show an average estimated gross tax gap of $441 billion (compared to $458 billion on average for 2008-2010) and an estimated overall “voluntary compliance rate” of 83.6% of tax liability. The new Tax Gap Map shows that, according to the IRS’s estimates, the single largest contributor to the federal tax gap, in dollars, remains underreporting by individuals of business income, at an average of $110 billion per year.
The new report is not only careful to state that methodology changes from the previous tax gap study influence the gross and net tax gap figures, it redoes the 2008-2010 voluntary compliance rate calculation with its revised methodology, to provide an apples-to-apples comparison. The IRS reports that, under the current methodology, the voluntary compliance rate for those years would be 83.8% instead of the 81.7% reported—very similar to the 83.6% voluntary compliance rate the IRS estimates for 2011-2013.
One thing that’s obvious in reviewing the new report is that the format of the new Tax Gap Map is different. (Compare the 2019 version with the 2016 version.) One difference from the previous Tax Gap Map is that the new release does not color code or label “Actual Amounts,” “Updated Estimates,” and “No Estimates Available.” The new version instead adds a visual illustration of the relative sizes of estimated total tax liabilities, tax collections and tax gap amounts. The color coding in the “map” reflects those categories. Another difference is that the new version does not include excise taxes in the map. The previous Tax Gap Map included them, although the dollar amount of the underpayment gap for excise taxes was small and the IRS did not have estimates for nonfiling or underreporting of those taxes. Continue reading “The IRS’s new Tax Gap Map”→
On February 28, Indiana University Maurer School of Law’s Tax Policy Colloquium, hosted this year by my colleague David Gamage, welcomed Vanessa Williamson from the Brookings Institution. Vanessa presented a report that is due to be released at the end of March on a “Filer Voter” experiment she conducted at Volunteer Income Tax Assistance (VITA) sites in Cleveland, Ohio and Dallas, Texas.
For those who may not be familiar with it, VITA is an IRS-run program that offers free tax return preparation (generally federal and state) for taxpayers who made $54,000 in income or less (for 2018) and meet certain other requirements. An IRS web page provides training materials and certification tests for volunteers. The IRS works with local groups in that it provides VITA grants to partner organizations. For example, in Bloomington, the VITA program is run by United Way of Monroe County.
Vanessa’s Filer Voter experiment involved offering some taxpayers who come to VITA sites for tax-return preparation the opportunity to register to vote. The experiment was structured as follows: Each VITA session was divided in half by time, and within each session, the first half or second half was randomly assigned the treatment of offering voter registration, and the other half of the session was the control. The study included collection of demographic information and consent forms from taxpayers in both the treatment and control groups. Continue reading “IU Tax Policy Colloquium: Williamson, Filer Voter: An Experiment Testing Voter Registration at Tax Time”→
On February 14, the Indiana University Maurer School of Law’s Tax Policy Colloquium hosted Larry Zelenak from Duke University School of Law. Larry presented his fun new paper, co-authored with his colleague Rich Schmalbeck, “The NCAA and the IRS: Life at the Intersection of College Sports and the Federal Income Tax.” Larry really hit this one out of the park, with a crowd that was nearly standing-room-only! Larry also hosted a terrific Valentine’s evening event, “Tax Sitcom Night,” featuring three classic sitcom episodes in which couples encounter the federal income tax together. I’ll discuss each of these briefly in this blog post.
Larry and Rich’s paper argues that the IRS has not done as much as Congress to cut back on “unreasonably generous tax treatment” of college athletics. The paper covers four principal topics, which Larry explained was a combination of Rich’s work on two issues and Larry’s on the other two. The four topics are:
The possible application of the unrelated business income tax to college sports;
the federal income tax treatment of athletic scholarships;
the recently changed tax treatment of charitable deductions for most of the cost of season tickets to college ball games; and
the new 21% excise tax of IRC § 4960 on compensation in excess of $1 million on certain employees of tax-exempt organizations.