Author: Shu-Yi Oei

I teach at Boston College Law School.

What My Noisy New Hobby is Teaching Me about Tax

Shu Yi Oei

While Sam was out there visiting the National Parks, I went and acquired a noisy new hobby.

drums

So far, I’ve only had two drum lessons but am completely hooked. What took me so long to pick up the drums? If you love music, get a kick out of repetitive motion, and enjoy making a big noise, I highly recommend it.

Learning the drum set is a matter of first impression for me. [FN1] So the actual noise making aside, it’s given me an unexpected midsummer opportunity to revisit what it feels like to learn a new skill for the first time, which of course makes me think about the fundamentals of teaching and writing in tax.

Here are some newbie observations:

  1. Assembling the Drum Set

I went out and bought a cheap drum set so I could practice at home. What really surprised me was the amount I learnt about the drums simply by virtue of assembling the drum set. Things I know now that I didn’t know before:

  • That restaurant in New Orleans called the High Hat? Turns out it probably isn’t named after an actual hat.
  • Who knew you had to tune the drums? It’s almost as if it’s a musical instrument or something.
  • The crash cymbal and high hat sit much lower to the ground than I had ever imagined.
  • You can actually turn the snares on a snare drum on and off. Did I know that? Nope.

The experience of assembling my own drum set was so useful that it got me thinking about how one might get one’s tax students to do the equivalent of assembling a drum set. Continue reading “What My Noisy New Hobby is Teaching Me about Tax” →

We Hear What We Want to Hear

Shu-Yi Oei

I’ve been preoccupied by country music these past few days. For this, I blame my Tulane colleague, Sally Richardson, who recently wrote this post on Property Law Profs Blog. In it, Sally makes the following observation:

Last week, my good friend, brilliant colleague, and property law scholar extraordinaire, Jim Gordley (Tulane), told me that he had been on a road trip and listened to a good deal of country music.  In the course of listening to a series of country songs, Jim decided that country music was about two things:  love and breaking the law.  Being from the south and having listened to my fair share of country music, I have to admit that Jim is right.  Just listen to Friends in Low Places, Achy-Breaky Heart, Before He Cheats, Folsom Prison Blues, and Ol’ Red and you can see for yourself.  Sure, there are some other songs about dogs and beer, but those are really in the minority.  Most country music is about love and the law.

Sally also shares some really genius lyrics coined by Jim, which include:

I assign and convey to you
That unencumbered heart
With one restrictive covenant
That we shall never part,
And this condition subsequent
That if you let it break,
Then I in my discretion
May reenter and retake.

Reminds me a bit of the Conway Twitty tax case—both the Tax Court’s Ode and the IRS AOD in response!

Of course, as a matter of substance, I think Jim and Sally are dead wrong. Love and breaking the law…pshaw! Aside from some notable lines such as the one about Ilsa the acrobat falling in love with Horatio the Human Cannonball, country music is, in fact, all about economic security, lending and financing, foreclosure, bailouts, and tax.

Let me explain:

Caveat: I have an immense soft spot for country music. Some days I have half a mind to move to Nashville and try to earn a living as a country music songwriter. (I’m only very slightly kidding about that.) However, I do not actually know anything about country music. And obviously, country music has a bazillion subgenres is about lots of other things as well (as this article describes), including the painful, painful process of creating legal scholarship.

Continue reading “We Hear What We Want to Hear” →

The Surly Subgroup Turns One!

Time flies when you’re having fun, I guess. Today is the one-year blogiversary of the Surly Subgroup. What started off as a group-blogging experiment hatched at last year’s Critical Tax Conference at Tulane Law School has provided quite a bit of entertainment for Surly bloggers and our guest bloggers, and hopefully for our readers as well.

It’s obviously been a big year on tax and other fronts. Since our inception, we’ve published 206 blog posts on a variety of topics. And we’ve drawn readers from 140 different countries.

Surly regulars and guest bloggers have covered various tax-related issues surrounding politics and the 2016 election—including disclosure of presidential tax returns, the Emoluments Clause, the Trump Foundation, and the Clinton Foundation. We’ve written about churches, 501(c)(3)s and the IRS treatment of non-profits. We’ve discussed the tax reform proposals of the 2016 presidential candidates and the #DBCFT. We’ve written several administrative law posts about Treasury Regulations and rulemaking.

Politics aside we’ve also covered other important issues in tax policy—including taxation and poverty, healthcare, tax policy and disabilities, tax compliance, and tax aspects of the Puerto Rico fiscal crisis. We’ve discussed several issues in international and cross-border taxes, touching on the EU state aid debate, the CCCTB, taxation and migration, the Panama Papers, tax leaks more generally, and tax evasion in China.

We hosted our first ever online Mini-Symposium on Tax Enforcement and Administration, which featured posts by ten different authors on a variety of tax administration topics. The Mini-Symposium was spearheaded by Leandra Lederman. Leandra had organized and moderated a discussion group on “The Future of Tax Administration and Enforcement” at the 2017 AALS Annual Meeting, and many of the discussion group participants contributed to the online symposium. We hope to organize future online symposia on other topics.

We’ve blogged about various conferences, workshops, and papers, both tax related and not-so-much tax related. We’ve also had lots of fun writing about taxes in popular culture – Surly bloggers and guest bloggers have written about the tax aspects of Pokémon Go, tax fiction, music-related tax issues (Jazz Fest! Prince! “Taxman”!), soccer players, dogs, Harry Potter fan fiction, Star Trek, and John Oliver. Surly bloggers even recorded a few tax podcasts!

In short, it’s been a busy year, and we’ve had a lot of fun with the Surly platform. We hope you have as well. Going forward, we’re going to keep the blog posts coming. We also hope to draw more regular and guest bloggers and to organize other online symposia.

Thanks for reading!

The Games We Play

Shu-Yi Oei

I’ve been ever so slightly glum since my colleague Ann Lipton went and blogged about this game called the Unicorn Startup Simulator over at BLPB. The goal of the game is for your startup to have a billion dollar valuation by the end of the year while keeping your employees happy. You have to make a series of decisions juggling those two goals. Turns out that’s harder than one might imagine. Here is what keeps happening to me:

Screenshot 2017-04-10 23.18.32

So, I guess the message is “don’t quit your day job”?

Anyway, I was feeling grumpy about not having cool tax games to call our own but then I went hunting around and realized, WAIT, we do have tax games! Whether they’re cool or not is another story.

Here are a couple:

Continue reading “The Games We Play” →

Teaching Depreciation with a #DBCFT Lurking

Shu-Yi Oei

I’m teaching depreciation in my Basic Federal Income Tax class this week. As I suspect is the case for most tax profs, our coverage of depreciation comes right after we wrap up discussion of expense taking in §§ 162 and 212 (and § 195) but before we get to § 165 losses.

Depreciation is literally my favorite topic in the entire universe to teach. I mean, if I was going to get a tattoo of a Code section on myself, it would literally be “26 U.S.C. § 168 (as amended).” No disrespect meant to 26 U.S.C. §§ 167, 179, 197 and friends. [Distraction: Here is a virtual tattoo generator. You, too, can practice getting your favorite Tax Code section inked on yourself.] I firmly believe that you can teach any number of core skills in tax class by teaching depreciation (e.g., statutory construction, policy choices, reading cross-references, political economy and legislative change, time value of money, etc.). Conversely, I also tend to think that if you can understand the depreciation statute in Basic Tax and explain it to your classmates, you can do pretty much anything in our legal profession.

Therefore, putting aside all of the reasons why cash-flow expensing may not have the effects that one might hope, I will be absolutely heartbroken if we actually end up with a cash-flow tax, because then what am I gonna talk about in tax class?

All of which brings me to today’s dilemma: Do I mention the ubiquitous #DBCFT in teaching depreciation this week? Or can I just pretend it’s not happening? If one does teach cash-flow expensing, when does one bring it up (i.e., in what order of coverage)? My inclination is to (1) explain the basics of how economic cost recovery over time works in theory; (2) talk briefly about the ACRS changes in 1981; (3) teach the Simon v. Commissioner cases (violin bows) to illustrate the policy tensions that arise once we move from true economic recovery and actual useful lives to ACRS and statutory recovery periods; (4) discuss #DBCFT as an alternative design approach, noting the possible benefits and downsides of that approach, noting that there’s some discussion in the ether right now re whether we should be doing this (and deemphasizing the border adjustment features); (5) introduce bonus depreciation concepts (§§ 168(k) and 179) as an illustration of how expensing has surreptitiously worked its way into the conversation in the guise of bonus depreciation circa financial crisis; and then (6) move right along to parsing the actual statutory elements of §§ 167 and 168 and understanding how it all stitches together.

This strikes me as a nice middle ground between (1) dorkin’ out and going #DBCFT full bore and totally losing the class, and (2) just ignoring the current debate. I’d be curious to know what other tax profs are doing with coverage here.

Cross-Training (or, Tulane Corporate and Securities Law Roundtable)

My pal Ann Lipton–corporate governance and securities law expert and blogger extraordinaire over at BLPB–is organizing a conference at Tulane Law School today on the topic of “Navigating Federalism in Corporate and Securities Law.” It looked so interesting that I had to leave Henry Ordower and Kerry Ryan’s fabulous Critical Issues in Comparative and International Taxation: Taxation and Migration Conference a day early to crash her party! I’ve been auditing Securities Regulation and very much feeling like a little duckling in the securities/corporate world all semester, so I’m really looking forward to sitting in on an unfamiliar conversation. I always find that “cross-training” in other fields gives me fresh perspectives on my own work.

Here is the schedule. Some of these papers are really interesting!

The Problem of Large Shareholders
(Discussant: Urska Velikonja)

The Problem of Small Shareholders
(Discussant: Ann Lipton)

  • Jill Fisch (Penn), Advance Voting Instructions: Tapping the Voice of the Excluded Retail Investor
  • J.W. Verret (George Mason), Uber-ized Corporate Law

What Can States Regulate?
(Discussant: Jill Fisch)

  • Kent Greenfield (Boston College), Corporate Power and Campaign Finance
  • Summer Kim (Irvine), Corporate Long Arms

The Line Between Corporate Law and Securities Law
(Discussant: James Cox)

  • Ann Lipton (Tulane), Reviving Reliance
  • James Park (UCLA), Delaware and Santa Fe
  • Robert Thompson (Georgetown), Delaware’s Dominance: A Peculiar Illustration of American Federalism

The Operation of the SEC
(Discussant: James Park)

  • James Cox (Duke), Revolving Elites: Assessing Capture in the SEC
  • Urska Velikonja (Emory), Admissions in Public Enforcement

Call for Papers: 18th Global Conference on Environmental Taxation (Tucson, AZ, Sept. 27-29, 2017)

Here’s another call for papers:

Please plan ahead for the 18th Global Conference on Environmental Taxation! The deadline for submitting abstracts in response to the Call for Papers is May 1, 2017 and early submissions are welcome. For information about the conference and the Call for Papers, click here.

This year the conference’s focus is: Innovation Addressing Climate Change Challenges: Local and Global Perspectives

We are in a pivotal and defining time for global discourse on public/private sector response at all levels of government (national, state, indigenous, provincial, municipal, city, and local), to the impacts of climate change. And, GCET18 is well-positioned in its role as the leading global forum for innovative exchanges on principles, practices, and policies with respect to environmental taxation and market-based instruments.

The conference will explore various topics :

  • Climate change policy, biodiversity protection, environmental stewardship, pollution control, water conservation, land degradation, renewable energy, mining and rehabilitation
  • Market instruments such as carbon pricing, emissions trading schemes, other environmental taxes, subsidies, direct action or spending programs and tax concessions both positive and perverse.

Selected papers from the Global Conferences are published in Critical Issues in Environmental Taxation.

The conference this year will be hosted by the University of Arizona, James E. Rogers College of Law, and the Conference Chair is Mona Hymel. If you have questions, please contact her at law-gcet18@list.arizona.edu.

We hope to see you in Tucson!

Prof. Janet E. Milne
Director, Environmental Tax Policy Institute
Co-editor, Handbook of Research on Environmental Taxation
Vermont Law School, USA

 

PROMESAs, PROMESAs?

Shu-Yi Oei

After swearing up and down that I would blog more about Puerto Rico’s 70 billion dollar debt crisis, I of course was remiss and did not. But a new paper by Mitu Gulati and Robert Rasmussen, “Puerto Rico and the Netherworld of Sovereign Debt Restructuring” has provided me the impetus to dive into this topic again.

Recall that unlike U.S. municipalities (such as Detroit), Puerto Rico bodies and utilities aren’t considered debtors for purposes of Chapter 9 of the U.S. Bankruptcy Code and therefore don’t have access to the municipal bankruptcy process. See 11 U.S.C. § 101(52). Puerto Rico attempted to address its fiscal woes by enacting the 2014 Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which created a debt restructuring mechanism analogous to Chapter 9 municipal bankruptcy. However, the U.S. Supreme Court ruled on June 13, 2016 that the Act was preempted by Section 903(1) of the U.S. Bankruptcy Code. Puerto Rico v. Franklin California Tax-Free Trust, 136 S. Ct. 1938 (2016). [Fn. 1]

After the Franklin Trust decision, Congress stepped in and passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) legislation on June 30, 2016, to allow Puerto Rico to restructure without filing for Chapter 9 bankruptcy. Briefly, PROMESA establishes an independent oversight board, provides for a bankruptcy-like debt restructuring process, and requires submission of a Fiscal Plan by Puerto Rico. Puerto Rico’s required Fiscal Plan was approved by the Oversight Board on March 13, 2017; however, that plan has come under criticism from bondholders.

This all begs the question, however, of what would have happened had Congress NOT passed the PROMESA legislation. Puerto Rico would have been left in a bind in which it had no access to the U.S. municipal bankruptcy process but was preempted from enacting any analogous debt restructuring mechanism by Section 903(1) of that same Bankruptcy Code, per Franklin California Tax-Free Trust. [Fn. 2]

Gulati and Rasmussen’s paper focuses on this question, arguing that, as a constitutional matter, the United States may not prohibit Puerto Rico from enacting its own bankruptcy-like restructuring process while offering no alternative mechanism. This leaves Puerto Rico in an untenable “netherworld,” in which it has the power to issue debt without the mechanisms for dealing with financial distress on the back end.

Continue reading “PROMESAs, PROMESAs?” →

When Leaks Drive Tax Law (a.k.a. our new paper!)

Shu-Yi Oei

Diane Ring and I just posted our new article, Leak-Driven Law, on SSRN. I had previously blogged about this paper as part of Leandra Lederman’s 2017 Mini-Symposium on Tax Enforcement and Administration, The abstract is here:

Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries.

The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially beneficial from an economic welfare perspective. This Article argues, however, that the conventional wisdom is too simplistic. In certain circumstances, leak-driven lawmaking may in fact produce negative social welfare outcomes. Agenda-setting behaviors of leakers and media organizations, inefficiencies in data transmission, suboptimally designed legislation, and unanticipated behavioral responses by enforcement-elastic taxpayers are all factors that may reduce social welfare in the aftermath of a tax leak.

This Article examines the potential welfare outcomes of leak-driven lawmaking and identifies predictable drivers that may affect those outcomes. It provides suggestions and cautions for making tax law, after a leak, in order to best tap into the benefits of leaks while managing their pitfalls.

In this paper, we wanted to explore how leaks of taxpayer data in the offshore context have shaped international tax law and policy, both in the US and other countries. We especially were interested in the possibility that—while leaks might appear useful on the surface from a tax enforcement and informational standpoint—there are unexplored pitfalls and downsides to relying on leaks to direct lawmaking and policy priorities.

In the non-tax world, of course, leaks have suddenly become very salient, in terms of both their usefulness and their dangers. But (non-tax lurkers take note!) tax law has been dealing with leaks of taxpayer information and what they mean for tax enforcement for at least the past ten years. Of course, tax leaks have some distinctive characteristics that make them different from other types of leaks. For example, the tax leaks that are the subject of this paper are usually (though not invariably) leaks of private taxpayer data, rather than leaks about governments from government sources.

We do think that the framework we introduce in our paper for analyzing the upsides and downsides of leak-driven lawmaking can be applied to explore how non-tax leaks and reactions to them may be socially beneficial but could also lead to less than ideal results. In both tax and in other fields, the meta-issue is not just how governments and private actors can use leaked information to sanction bad behaviors, make decisions, or design laws. Rather, the issue is how the actions and responses of leakers, governments, journalists, international organizations and the public work together to create and promote certain outcomes. Once we understand the underlying dynamics, then we can consider how the outcomes they create should be evaluated, supported, or resisted.

If you’re working on leak-related scholarship in either tax or other fields, we’d love to chat.

Leak-Driven Lawmaking

Shu-Yi Oei
Hoffman F. Fuller Professor of Law, Tulane Law School

Over the past decade, a steady drip of tax leaks has begun to exert an extraordinary influence on how international tax laws and policies are made. The Panama Papers and Bahamas leaks are the most recent examples, but they are only the tip of the leaky iceberg. Other leaks include (in roughly chronological order) the UBS and LGT leaks; the Julius Baer leak; HSBC “SwissLeaks”; the British Havens leaks; and the LuxLeaks scandal.

These tax leaks have revealed the offshore financial holdings and tax evasion and avoidance practices of various taxpayers, financial institutions, and tax havens. In so doing, they have been valuable in correcting long-standing informational asymmetries between taxing authorities and taxpayers with respect to these activities. Spurred by leaked data, governments and taxing authorities around the world have gone about punishing taxpayers and their advisers, recouping revenues from offshore tax evasion, enacting new domestic laws, and signing multilateral agreements that create greater transparency and exchange of financial information between countries.

Thus, it is clear that leaked data has started to be a significant driver in how countries conduct cross-border tax enforcement and make international tax law and policy. But using leaks to direct and formulate tax policy responses comes with some potentially serious pitfalls.

In a new paper—coming soon to an SSRN near you[fn.1]—Diane Ring and I explore the social welfare effects of leak-driven lawmaking. Our argument, very generally, is that while data leaks can be socially beneficial by virtue of the behavioral responses they trigger and the enforcement-related laws and policies generated in their wake, there are under-appreciated downside hazards and costs to relying on leaked data in deterring tax evasion and making tax policy.

Continue reading “Leak-Driven Lawmaking” →

Tulane Seeks Fall 2017 Visitors

Here’s another hiring announcement from Tulane Law School, this time for Fall 2017 visitors:

Tulane Law School invites applications for a one-semester visiting position in the Fall of 2017. Our specific needs for the Fall 2017 semester include basic income tax and corporate tax, criminal law, and professional responsibility. Applicants must possess a J.D. from an ABA-accredited law school, strong academic credentials, and at least three years of relevant law-related experience; prior teaching experience is strongly preferred. Applicants should submit a letter of interest, CV, and the names and contact information of three references through Interfolio at https://apply.interfolio.com/40060. For additional information, please contact Onnig Dombalagian atodombala@tulane.edu.

Tulane University is an equal employment opportunity/affirmative action employer committed to excellence through diversity. All eligible candidates are invited to apply for position vacancies as appropriate.

Tulane Law School Seeks to Hire Forrester Fellow and VAP

I’m passing along this hiring announcement from Tulane Law School for two positions: (1) the Forrester Fellowship, and (2) a VAP position focusing on the regulation of economic activity, broadly defined. (Emerging scholars doing work in tax are welcome to apply for both positions.)

Tulane Law School invites applications for its Forrester Fellowship and visiting assistant professor positions, both of which are designed for promising scholars who plan to apply for tenure-track law school positions. Both positions are full-time faculty in the law school and are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support, both formal and informal, including faculty mentors, a professional travel budget, and opportunities to present works-in-progress to other faculty workshop in various settings.

Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to two sections of 25 to 30 first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a J.D. from an ABA-accredited law school, outstanding academic credentials, and at least three years of law-related practice and/or clerkship experience. To apply, please visit the Tulane University “iRecruitment” website at http://tinyurl.com/phd53k7. If you have any questions, please contact Erin Donelon at edonelon@tulane.edu.

Tulane’s visiting assistant professor (VAP), a two-year position, is supported by the Murphy Institute at Tulane (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy and ethics that draws faculty from the university’s departments of economics, philosophy, history, and political science. The position entails teaching a law school course or seminar in three of the four semesters of the professorship (presumably the last three semesters). It is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation). In addition to participating in the intellectual life of the law school, they will be expected to participate in scholarly activities at the Murphy Institute. Candidates should apply through Interfolio, at apply.interfolio.com/, providing a CV identifying at least three references, post-graduate transcripts, electronic copies of any scholarship completed or in-progress, and a letter explaining your teaching interests and your research agenda. If you have any questions, please contact Adam Feibelman at afeibelm@tulane.edu. 

The law school aims to fill both positions by March 2017.  Tulane is an equal opportunity employer and encourages women and members of minority communities to apply.

ClassCrits IX: The New Corporatocracy and Election 2016

Surly bloggers Sam Brunson, David Herzig and I (and Leslie Book over at Procedurally Taxing) are attending the ClassCrits IX conference hosted by Loyola University Chicago School of Law today and tomorrow. From the call for papers back in March:

As the U.S. presidential election approaches, our 2016 conference will explore the role of corporate power in a political and economic system challenged by inequality and distrust as well as by new energy for transformative reform.

There are some notable tax-related panels happening at the conference, along with other interesting panels relating to corporations and democracy:

Taxation, Social Justice and Development (Friday 10/21/16)

Doron Narotzki, University of Akron Business Administration
Corporate Social Responsibility and Taxation: The Next Step of the Evolution

Rohan Grey, Binzagr Institute for Sustainable Prosperity & Nathan Tankus, Modern Money Network
Corporate Taxation in a Modern Monetary Economy: Legal History, Theory, Prospects

Karl Botchway, CUNY Technology & Jamee Moudud, Sarah Lawrence Economics
Capacity Building, Taxation and Corporate power in Africa

Martha T. McCluskey, SUNY Buffalo Law, Corporatocracy and Class in State and Local “Job-Creation” Subsidies

Distributing Wealth, Law and Power (Friday 10/21/16)

Goldburn P. Maynard, Jr., University of Louisville Law
A Plea for Courts to Abolish the Judicially Created Right of the Wealthy to Avoid Estate Taxes

Victoria J. Haneman, Concordia University Law
The Collision of Holographic Wills and the 120-Hour Rule

Doron Narotzki, University of Akron Business Administration
Dark Pools, High-Frequency Trading and the Financial Transaction Tax: A Solution or Complication?

Robert Ashford, Syracuse University Law
Why Working But Poor?

Critical Perspectives on Tax Law (Saturday 10/22/16)

Shu-Yi Oei, Tulane University Law
The Troubling Case of Offshore Tax Enforcement

Les Book, Villanova University Law
Bureaucratic Oppression and the Tax System

Samuel Brunson, Loyola University Chicago Law
Avoiding Progressivity: RICs, Pease, and the AMT

David Herzig, Valparaiso University Law
Let Prophets Be (Non) Profits

Make Way for Ducklings?

Shu-Yi Oei 

Professor Charlotte Crane (Northwestern) presented Integrating a Fragmented Corporate Income Tax at BC Law School’s Tax Policy Workshop yesterday. Briefly, the paper is focused on recent proposals to integrate the corporate income tax, in particular, the yet-to-be-released Orrin Hatch proposal from the Senate Finance Committee. I’m no corporate tax expert, but the workshop afforded me the excuse to wade like a duckling through the recent literature…a nice break from other projects.

The corporate integration debate refers to the question of whether to eliminate the corporate double tax (i.e., the tax on both the corporation and its shareholders on the same underlying income) and replace it with a single layer of tax. Many have argued that this would reduce tax burdens, minimize economic distortions, and bring us closer to tax neutrality in investment decisions. Others have argued that corporate integration achieved through shifting the corporate tax to the shareholder level will enhance progressivity and fairness.

The integration debate has raged for decades, with important Treasury and ALI studies in 1992 and 1993, and a surge of recent academic and policy interest. There are various design possibilities, including: integration via a shareholder credit (a.k.a. imputation), integration via a dividend deduction paired with a shareholder withholding tax, integration via a shareholder dividend exclusion, flow-through taxation, and others. A couple of recent proposals: Toder and Viard have suggested eliminating the corporate tax and replacing it with taxation of shareholder dividends and gains at ordinary rates, with gains taxed on a mark-to-market (accrual) basis. And Gruber and Altshuler even more recently proposed pairing a lowered (15%) corporate tax rate with ordinary income taxation of shareholder dividends and capital gains (including an interest charge on deferred shareholder liabilities designed to minimize behavioral distortions).

Continue reading “Make Way for Ducklings?” →

Does Enforcement Reduce Compliance?

Shu-Yi Oei 

Boston College Law School held its first Tax Policy Workshop of the semester last Thursday and the speaker was Surly Blogger Leandra Lederman. Leandra presented a draft paper entitled “To What Extent Does Enforcement Crowd Out Voluntary Tax Compliance?” The draft isn’t publicly available yet, but you can email Leandra for a copy.

So, what’s the paper about? The standard economic model tells us that a taxpayer will weigh the magnitude of the penalty and the likelihood of audit to reach an “expected” cost of punishment for tax evasion. Allingham & Sandmo (1972). So, if the audit rate is low (which it is), the expected cost of evasion also remains low, absent draconian penalties. Yet, we see relatively high voluntary compliance rates in the U.S. Some scholars claim that this is a “puzzle” and theorize that there is some sort of “intrinsic motivation” to comply with tax obligations, regardless of the low expected costs of punishment. Leandra has pointed out in several articles that this simple comparison presents a false puzzle because it ignores information reporting (and withholding), which IRS voluntary compliance statistics show is highly effective. She argues that information reporting is akin to an invisible audit. Nonetheless, some scholars suggest that enforcement and deterrence action are “extrinsic motivators” that might actually reduce compliance by displacing (i.e., “crowding out”) preexisting internal motivations to comply.

Leandra’s paper synthesizes the empirical literature on the effects of audit threats and fines as well as the growing tax and non-tax literature on contexts in which enforcement can lead to reduced compliance. In brief, the paper finds:

Continue reading “Does Enforcement Reduce Compliance?” →