We Should be Taking President Trump’s Tax Plan Seriously

By: David J. Herzig

Today President Trump’s top tax advisors laid out the first details of the his tax plan. Chief economic adviser Gary Cohn and Treasury Secretary Steve Mnuchin unveiled the plan which according to Fox News, Cohn called “the most significant tax reform legislation since 1986, and one of the biggest tax cuts in American history.”

Oh, did I mention that the details of the biggest cuts were printed on a single sheet of paper?

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There has been plenty of ink (and jokes) already spilled about the plan.  For example, you can read Richard Rubin of the WSJ (here) or Alan Rappeport of the NY Times (here). The long and the short of the plan is it seems to very very costly.  The Committee for a Responsible Federal Budget guesses it could cost $3 to $7 trillion with their estimate at $5.5 trillion.  That is a lot of money!

Continue reading “We Should be Taking President Trump’s Tax Plan Seriously”

A Libertarian Tip

By: David Herzig

Yesterday on Twitter, Scott Greenberg (@ScottElliotG) posted the following tweet from Matt Bruenig.

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Well, David Gamage, Omri MarianAndy Grewal and I had fun in 120 characters debating the quality of the tax advice provided on both the receipt and the note.  Suffice to say: (A) this will be appearing on a number of basic income tax exams shortly;[1] and, (B) neither piece of advice provided by “Mr. Libertarian” seems to be correct.  Both David and I pointed out that the “tip” did not seem to meet the old Duberstein detached and disinterested test.  Clearly there was a quid-pro-quo; don’t spit on my food and I will give you extra money in addition to the bill.

Joking around about the gift/income distinction made me think that tipping is very tax inefficient.  Assuming that what I said is true: tips are not gifts and they are income to the recipient. This means that the payment is not deductible by the payor (just personal consumption) yet income to the recipient, i.e. the server. If it is ordinary income to the recipient, then there should be a corresponding wage deduction, right?

Let’s assume the following counterfactual.  The restaurant includes the tip as part of the bill.  The restaurant pays the employee salary including the entire tip.  Under this structure, the restaurant would receive an entire wage adjustment for the tip paid.  The customer is still does not receive a deduction for paying the employee’s wages and the employee still pays the same amount of income tax.  But the employer captures the unused deduction for wages by the customer.  Theoretically, this deduction could be shared by all the stakeholders to reduce costs to all parties.

Who cares?  Well, only economists and tax professors, probably.  Back to finals preparation!

[1] Here is David Gamage’s hypo: customer leaves $1K and says, I just won the lottery and want to share some of my winnings as a “gift”. 

The Strategic Case Against the Democratic Filibuster of Neil Gorsuch

Photo: Jarrad Henderson, USA TODAY

By: Daniel Hemel and David Herzig

[Note: This post is co-authored with Daniel Hemel, Assistant Professor of Law at The University of Chicago School of Law.]

The strategic case against a Democratic filibuster of Neil Gorsuch is straightforward. The argument is not that the filibuster will prevent President Trump from putting someone like Andrew Napolitano on the Court. The argument is that the filibuster may prevent President Trump from filling a future vacancy with a well-credentialed conservative who is ideologically similar to or right of Judge Gorsuch. To elaborate:

— (a) The filibuster accomplishes no work when there are fewer than 50 Senators who will support a nominee on an up-or-down vote. (Napolitano presumably falls into this category.)

— (b) The filibuster also does no work when there are 50 or more Senators who will support a nominee even if that means going nuclear. (Judge Gorsuch appears to fall into this category.)

— (c) The filibuster matters when (1) there is a nominee who would win 50 or more Senators on an up-or-down vote, but (2) fewer than 50 Senators would support the nuclear option in order to put the nominee on the Court.

Is (c) an empty set?

Continue reading “The Strategic Case Against the Democratic Filibuster of Neil Gorsuch”

Tax Professors on Twitter

By David J. Herzig

By David Herzig

I am trying to keep this updated quarterly.  So, please find the most updated list.  There are a number of new names on the updated list as tax professors continue to enter the twitterverse.  I did update the list to be in alphabetical order.  As always, if I am missing someone, please let me know.

Starting with the SurlySubgroup (@surlysubgroup)

Jennifer Bird-Pollan (@jbirdpollan)

Sam Brunson (@smbrnsn)

Phil Hackney (@EOTaxProf)

David Herzig (@professortax)

Stephanie Hoffer (@Profhoffer)

Leandra Lederman (@leandra2848)

Ben Leff (@benmosesleff)

Francine Lipman (@Narfnampil)

Diane Ring (@ringdi_dr)

Shu-Yi Oei (@shuyioei)

Other United States/Canadian Tax Professor (in alphabetical order):

Continue reading “Tax Professors on Twitter”

Twitter Tax Feeds for 2017

By David Herzig

I promised I would update the twitter tax feeds in my last post.  There are a number of new names on the updated list as tax professors continue to enter the twitterverse.  I did update the list to be in alphabetical order.  As always, if I am missing someone, please let me know.

Starting with the SurlySubgroup (@surlysubgroup)

Jennifer Bird-Pollan (@jbirdpollan)

Sam Brunson (@smbrnsn)

Phil Hackney (@EOTaxProf)

David Herzig (@professortax)

Stephanie Hoffer (@Profhoffer)

Leandra Lederman (@leandra2848)

Ben Leff (@benmosesleff)

Francine Lipman (@Narfnampil)

Diane Ring (@ringdi_dr)

Shu-Yi Oei (@shuyioei)

Other United States/Canadian Tax Professor (in alphabetical order):

Continue reading “Twitter Tax Feeds for 2017”

Top 2017 Tax Twitter Follows

By David Herzig

Every year, Kelly Erb (@taxgirl) posts her top tax Twitter follows.  This year, I was fortunate to make the list.  In addition to my shameless self promotion, I am directing you to her article because it was nice to see that many other academics made the list.

I think the fact that so many academics made this list is very important right now.  First, academics tend to get a bad rap for living in ivory towers.  Twitter is a great egalitarian platform. Second, in the upcoming months, active engagement by the best and brightest is paramount.  Twitter for all its flaws allows for real time interactions.  Seriously, you would be amazed how far you can spread your knowledge!  Finally, it reminds me to update my old list I posted at Surly. If I am missing your name, please let me know and I will repost later this month.

In the meantime, here were the academics on the list:

Tim Todd – @lawproftodd – Assoc Dean for Academic Affairs & Law Professor @LibertyLaw;

Andy Grewal – @AndyGrewal  – Professor of Law, @uiowa;

Judith Freedman – @JudithFreedman –  Oxford University Professor of Taxation Law;

Lily Batchelder  – @lilybatch – Professor of Law & Public Policy at @nyulaw;

David Herzig  – @professortax –  – Professor of Law @ValparaisoLaw;

Allison Christians – @taxpolblog –  Stikeman Chair in Tax Law, McGill University; and

Xavier Oberson – @XavierRoberson –  Professor of Swiss and International Tax Law at Geneva University

Budget Reconciliation Process and Obamacare

By: David Herzig

Friday the Wall Street Journal published Daniel Hemel and my article on why we think it will be very hard for the Senate to just do away with the ACA (aka Obamacare) via reconciliation.  We follow-up our earlier Surlygroup posting (also cross-posted at Yale J. Reg.) which discussed why the Senate norms are hard to break.  Since that article, we have developed some fairly interesting models on why we think the Senate norms are rather sticky – more on that to come.

In the Wall Street Journal article we state, “Most significantly, Majority Leader Mitch McConnell and his caucus may be forced to choose between their antipathy toward the ACA, also known as Obamacare, and their allegiance to longstanding institutional norms. In the end, the scope of ACA repeal will likely depend on whether Senate Republicans decide to score political victories in the short term or to maintain the Senate’s unique culture for the long haul.”

The problem for the republicans is the Byrd rule.  Repeal of the ACA will have budgetary impact beyond the budget window.  A decision will need to be made on the impact.  As we stated, “On some reconciliation-related questions, the presiding officer defers to the Budget Committee chairman, currently Senator Mike Enzi. On other questions, including whether a provision produces “merely incidental” effects on the budget, the presiding officer generally follows the advice of the Senate’s nonpartisan parliamentarian, the official adviser to the Senate on the body’s rules.”

Continue reading “Budget Reconciliation Process and Obamacare”

Rockefellers, Pratts and Private Cemeteries

By: David J. Herzig

The New York Times wrote about the Pratt Family burial plot. As Daniel Hemel pointed out there was also a tax story; apparently, the cemetery qualifies as a 501(c)(13) tax-exempt entity. So, when you combine tax and a Cleveland company, I was fascinated by the story. [1]

Because the cemetery is tax-exempt under section (c)(13), it can only benefit its members. This is contrary to the general rule for tax-exempts that you benefit everyone as opposed to just members. The question that the IRS had to address was how discriminatory could the cemetery be.  For example, whether both the Rockefellers and the Pratts could be buried in the cemetery. According to Daniel’s review of the rulings and regulations, “the Pratt family cemetery won’t lose its tax exempt status if it excludes the Rockefellers (or any other non-Pratts) from being buried there. But the family cemetery need not limit membership to Pratts in order to maintain its tax exemption.” All of which is true.

But, I wondered why does the family care so much about maintaining the tax exemption. I started to dig around to find the 990s of the cemetery. What if the tax-exemption were terminated? (As a certain President Elect has come to decide – sometimes the maintenance of tax-exempt entities are more trouble than they are worth).

Continue reading “Rockefellers, Pratts and Private Cemeteries”

The Amazing Section 1202

By: David Herzig

I was fortunate enough to present to the Chicago Estate Planning Council about a week ago.  I rearranged a presentation that I gave at the Notre Dame Tax and Estate Planning Institute. (As an aside, both of these forums are great sources of continuing cutting edge eduction for the practicing bar).  I spent the majority of the hour I was allotted describing section 1202 the Qualified Small Business Stock Exemption.  To my shock, most of the 300 in attendance either were not familiar with the provision or had not thought about it for a decade.  After a quick twitter exchange, I thought I would do a short post explaining the code section as well as why it should be used or at least discussed more.

First, can everyone in Silicon Valley please stop laughing. I get it. You have been using 1202 since the 1990s.  Almost every VC agreement requires the target to qualify as 1202.  For the rest of us, let me catch you up on why 1202 is maybe one the largest give aways in the tax code today.

The QBSB Election came in existence in 1993. Why was the section so forgettable?  Well, if I told you there was a tax credit if you formed a C corp that lowered your rate from 28% to 14% but still had an AMT phase-out – I probably lost you at C Corp.  Even if I had your attention, as capital rates lowered to 20%, the QSBS stayed steady at 14% so why set a C Corporation to save 6%? Yes, 6% is a large savings but, not, when the Code required that 7% of the amount excluded from gross income be treated as a “preference” item and subject to AMT.

Continue reading “The Amazing Section 1202”

The Art of the (Budget) Deal

By Daniel Hemel and David Herzig

Who Holds the Trump Card on Reconciliation?

Republicans on Capitol Hill are reportedly planning to use the filibuster-proof budget reconciliation process to repeal the Affordable Care Act and overhaul the tax code. Against that background, Sam Wice says that “the most powerful person in America” in 2017 will be Senate Parliamentarian Elizabeth MacDonough, the nonpartisan official who will “determine” how much of their agenda Republicans can pass through reconciliation. This, of course, is an exaggeration: like it or not, the most powerful person in America in 2017 will be Donald J. Trump, who will wield all the power of the imperial presidency. But Wice’s post helpfully directs our attention to the budget reconciliation process, the rules of which quite likely will determine whether the Republican leadership on Capitol Hill can repeal the ACA and reform the tax laws.

Yet while one should not underestimate the importance of reconciliation, one should also not overestimate the power of the Parliamentarian in the reconciliation process. As a formal matter, the Parliamentarian’s role is advisory; and as a practical matter, the Parliamentarian has little say over significant aspects of reconciliation. Other actors—most notably, Senate Budget Committee Chairman Mike Enzi (R-Wy.)—wield at least as much influence as the Parliamentarian. Most importantly, Enzi—not MacDonough—will determine whether the provisions in any reconciliation bill violate various rules against deficit-increasing legislation being passed via reconciliation. And unlike the Parliamentarian, the Budget Committee Chairman is very hard to fire.

Reconciliation measures can begin in either or both chambers. However, since the ultimate vote on the budget measure occurs in the Senate, we’ll focus on the Senate side of the reconciliation process for purposes of this discussion. On the House side, the Rules Committee Chair and the Budget Committee Chair will wield outsized influence as well. We expect Pete Sessions (R-Tex.) to stay on as House Rules Committee Chair; as for the House Budget Committee Chair, the race is on for a replacement to Tom Price, the Georgia Republican recently tapped as Trump’s Health and Human Services Secretary.

To understand why the Budget Committee Chair is as powerful as he is, a bit of background on reconciliation may be helpful. Continue reading “The Art of the (Budget) Deal”