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!
I just finished drafting a paper that got me reading a lot about corporate fraud. I find fraud fascinating, so this was a bit of a treat! The new paper is Information Matters in Tax Enforcement, and it’s co-authored with my former student Joe Dugan (JD ’15), who is an attorney at DOJ (but did not write in his official capacity). We recently posted the article on SSRN (here), and will soon be looking for a home for it.
This article was prompted by Professor Wei Cui’s publication of Taxation Without Information: The Institutional Foundations of Modern Tax Collection, 20 U. Pa. J. Bus. L. 93 (2018). Cui sets forth the contrarian thesis that “modern governments can practice ‘taxation without information.’” His argument rests on two premises: (1) “giving governments effective access to taxpayer information through third parties does not explain the success of modern tax administration”; and (2) modern tax administration succeeds because business firms are pro-social, fostering compliance. Professor Daniel Hemel favorably reviewed Cui’s article on TaxProf blog.
Cui particularly takes issue with Henrik J. Kleven et al., Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries, 83 Economica 219 (2016), and Dina Pomeranz, No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax, 105 Am. Econ. Rev. 2539 (2015), both of which show the importance of third-party information reporting to tax enforcement. Cui’s article also criticizes Leandra Lederman, Reducing Information Gaps to Reduce the Tax Gap: When Is Information Reporting Warranted?, 78 Fordham L. Rev. 1733 (2010), which argued that information reporting is useful but not a panacea, and set forth six factors to evaluate the likely effectiveness of proposed information-reporting requirements.
Information Matters in Tax Enforcement takes on both of Cui’s arguments, as well as his subsidiary claim that the value-added tax (VAT) does not involve third-party reporting or reporting of individual transactions. Joe and I marshal a lot of evidence to show (1) third-party information reporting is generally very effective, and (2) firms are not inherently pro-social. Rather, the literature supports Kleven et al.’s argument that numerosity increases compliance. That is, where more people would have to collude, cheating is less likely due to the increased risk of defection. The fact that large firms generally are more tax compliant than small ones—a point Cui concedes—is consistent with that. Large firms are also subject to more regulation and oversight, which produce reliable information flows from the firm to the government. Joe and I also show that VATs do involve third-party reporting, with the modern trend being digital real-time reporting. Continue reading “New Paper on Tax Enforcement and Corporate Malfeasance”→
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””→
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”→
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”→
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?”→
I’m currently at the #SEALS2018 conference in Ft. Lauderdale, but I wanted to quickly note that the opinion of the 9th Circuit panel in Altera Corp. v. Commissioner was withdrawn today. This follows the replacement of Judge Reinhardt, who passed away on March 29, with Judge Graber. Recall that the July 24 opinion in this important case reflected a 2-1 decision, with the late judge in the majority, as Christopher Walker and others had noted. (For my previous coverage of Altera, see here and here.)
A screenshot of the court’s order appears below. It will be interesting to see what happens after the new panel confers!
In a 2-1 opinion, a panel of the Court of Appeals for the Ninth Circuit has reversed the U.S. Tax Court in Altera v. Commissioner. (I don’t have a link yet to the opinion because it just came out this morning, but will add it as a comment when I do.) The decision is great news for IRS rulemaking: the Court of Appeals upheld a Treasury regulation in the face of a procedural challenge that alleged that “although Treasury solicited public comments, it did not adequately consider and respond to those responses, rendering the regulations arbitrary and capricious under State Farm.” Altera, slip. op. at 27. The court found that Treasury’s approach to the regulation (a cost-sharing regulation under Code section 482) satisfied State Farm‘s requirements. Id. at 37. The Court of Appeals also accorded the regulation Chevron deference. Id. at 46.
In my view, this is the right outcome. (Full disclosure: Susan Morse and Stephen Shay spearheaded an amicus brief in the Ninth Circuit in favor of the Commissioner, in which I joined, along with Dick Harvey, Ruth Mason, and Bret Wells.) Treasury did consider and respond to the comments it received on the regulation; it simply had a different approach to the substance of the regulation than the taxpayers commenting did. The Court of Appeals explains:
“In short, the objectors were arguing that the evidence they cited—showing that unrelated parties do not share employee stock compensation costs—proved that Treasury’s commensurate with income analysis did not comport with the arm’s length standard. Thus, the thrust of the objection was that Treasury misinterpreted § 482. But that is a separate question—one properly addressed in the Chevron analysis. That commenters disagreed with Treasury’s interpretation of the law does not make the rulemaking process defective.”
“Because the Commissioner does not contest the applicability of the APA or Chevron in this context, this case does not require us to decide the broader questions of the precise contours of the application of APA to the Commissioner’s administration of the tax system or the continued vitality of the theory of tax exceptionalism.”
Id. at 25 n.5. Dan Shaviro has blogged about the decision on Start Making Sense, noting that “the Chevron standard for reviewing administrative regulations . . . may well be on the Supreme Court’s chopping block in the near future.”
I would expect more coverage of the Altera decision soon. For prior Surly coverage, see here.
On April 5, the Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Len Burman from Syracuse University and the Urban Institute/Tax Policy Center, who presented “The Rising Tide Wage Credit.” This intriguing new paper is not yet publicly available.
The paper proposes replacing the existing Earned Income Tax Credit (EITC) with a new credit, the Rising Tide Wage Credit (RTWC), which, unlike the EITC, would be universal for workers, rather than phased out above low income levels. The RTWC also would differ from the EITC in that the amount of the RTWC would not depend on the number of children the taxpayer has. Instead, the RTWC would be a 100% credit in the amount of a worker’s wages, up to $10,000 of wages. The credit could be claimed on the taxpayer’s tax return, or subject to advance payment via the taxpayer’s employer. Thus, the maximum credit for an unmarried taxpayer would be $10,000, and for a married couple filing jointly would be $20,000. (The credit would not have a marriage penalty.) The credit would be indexed to increase with increases in GDP.
Because the proposed new credit would not vary with the number of children the taxpayer is supporting, the paper also proposes increasing the child tax credit from $2,000 to $2,500, and proposes making the child tax credit fully refundable (rather than partly refundable, as it is under current law). The RTWC and the increase in the child tax credit would be funded by a value added tax (VAT). The paper estimates that the proposal could be fully funded with an 8% VAT, along with federal income tax on the RTWC. A VAT was chosen as the funding mechanism because it is closely correlated with GDP. The paper discusses 3 illustrative examples and includes a table that shows the overall progressivity of the proposal under certain assumptions. Continue reading “IU Tax Policy Colloquium: Burman, “The Rising Tide Wage Credit””→
On March 22, the Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Prof. Emily Satterthwaite from the University of Toronto Faculty of Law, who presented “Optional Taxation: Survey Evidence from Ontario Microentrepreneurs.” This interesting new paper is not yet publicly available.
The paper explores Canada’s “small supplier” exemption from value-added tax (VAT) registration. Canada’s exemption allows suppliers with less than CAD $30,000 of sales (turnover) in a year to avoid registering for and complying with the VAT unless they opt in. (This amount is not indexed for inflation, and Emily’s paper explains that this threshold is fairly low.) Although it may seem odd for someone to opt into a tax system, as Emily’s paper explains, some small suppliers have incentives to do so: if they buy supplies subject to VAT, they can offset that against VAT owed, and obtain a refund if VAT paid exceeds VAT due. In addition, some small suppliers may be encouraged by their VAT-registered customers to become part of a formal supply chain, because the VAT those customers pay on inputs is creditable. The downside of registering is the cost of doing so, which includes the requirement to file an annual return regardless of whether VAT is owed. Continue reading “IU Tax Policy Colloquium: Satterthwaite, “Optional Taxation: Survey Evidence from Ontario Microentrepreneurs””→
On March 1, the Indiana University Maurer School of Law welcomed Surly’s own Prof. Diane Ring from Boston College Law School as the fourth speaker of the year in our Tax Policy Colloquium. Diane presented a new paper, which I believe is not yet publicly available, titled “Silos and First Movers In the Sharing Economy Debates.” This interesting paper focuses on the classification of workers in the “sharing” or “gig” economy as employees or independent contractors, arguing that “[t]wo interacting forces create the most serious risk for inadequate policy formulation: (1) silos among legal experts, and (2) first-mover effects.” (Page 1 of the draft.) The silo argument is that lawyers operate in subject areas that are isolated from each other, such that tax experts, for example, fail to perceive the effects of tax-related worker-classification rule changes on non-tax (such as employment) law, and vice versa. The first-mover argument is that the first actors on the worker-classification issue can wield outsized influence, shaping the debate in legal contexts other than the one directly affected.
On February 28, Prof. Stephanie McMahonfrom the University of Cincinnati College of Law gave a faculty workshop at the Indiana University Maurer School of Law. She presented her paper titled “Tax as Part of a Broken Budget: Good Taxes are Good Cause Enough.” The thesis of the paper is that Treasury regulations are needed to effectuate the statutory tax laws consistent with Congress’s budgeting expectations, and that given the importance of the revenue raised by taxes to the functioning of the U.S. federal government, tax regulations should be excused from the Administrative Procedure Act’s pre-promulgation notice-and-comment process under the APA’s “good cause” exception. The paper thus tackles two arguments that Prof. Kristin Hickman has advanced in her work: post-promulgation notice and comment is insufficient for tax regulations, and there is no reason for “tax exceptionalism” in administrative procedures. Stephanie’s paper also contains a detailed explanation of the tax legislative process.
On February 15, the Indiana University Maurer School of Law welcomed Prof. Ari Glogower from Ohio State University Moritz College of Law as the third speaker of the year in our Tax Policy Colloquium. Ari presented his paper titled “Taxing Inequality,” which argues in favor of a federal wealth tax and proposes a mechanism for integrating the base of such a tax with the base of the federal income tax. Ari’s paper sparked a really interesting discussion both in and outside the workshop on a wide range of issues, from distributive justice to the mechanics and likely impacts of his proposal.
The paper focused first on why we should have a federal tax on wealth. The draft points to rising economic inequality, and it grounds the need for a wealth tax in the theory of “relative economic power.” That theory, borrowed from political science, focuses on spending power—as opposed to actual spending—as a source of economic power. The basic idea is that the mere ownership pf wealth creates economic power without spending it. Moreover, “excessively unequal distributions of economic resources and market power can result in unequal divisions of political and social power as well.” (p.19) One of Ari’s paper’s contributions is to apply this economic-power theory as a justification for a progressive tax system.
The draft then describes the problem that tax-system designers have in imposing both a wealth tax and an income tax. Because the two types of taxes are imposed on different bases, if the taxes are not coordinated, taxpayers with very different abilities to pay based on their income or wealth may be taxed identically. The paper includes some nice examples of taxpayers with the same income but vastly different stocks of wealth and vice versa. It shows, for example, that a taxpayer with $200,000 of current income and no wealth (or negative wealth in the form of student-loan debt) has lower ability to pay than a taxpayer with $200,000 of current income and $35 million in wealth. (Ari’s talk included a great slide featuring an image of Scrooge McDuck swimming in money as the wealthy taxpayer, but for whatever reason, he resisted our suggestion to rename the paper “Taxing Scrooge McDuck”!) Continue reading “IU Tax Policy Colloquium: Glogower, “Taxing Inequality””→