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”

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”

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

When your job is predicting the future

rainBy: Diane Ring

In a post earlier this week, I considered how the international tax conference I was attending (the annual worldwide meeting of the International Fiscal Association, IFA) had something in common with the Japanese anime and manga conference hosted in the adjacent venue. Soon the anime event ended and the tax conference continued, but with a new neighbor – the Meteorological Technology World Expo 2016. No costumes – but some interesting, though puzzling, equipment outside in the courtyard. I thought about the big task of meteorology—predicting the future. Turns out that in-house tax advisors have the same job, it’s just that instead of rain, they predict the tax implications of business decisions for the C-suite. But the tax advisors do it without the tech, and there is a lot to keep them up at night . . . Continue reading “When your job is predicting the future”

International tax meets Japanese anime

By: Diane Ring

On Sunday, international tax lawyers and advisers from private sector, government officials, tax representatives from international organizations, in-house counsel, and tax academics converged on the convention center in Madrid for the annual conference of the International Fiscal Association (IFA).

But we were not alone.

An adjacent exhibition hall hosted “Japan Weekend 2016” a celebration of Japanese anime and manga. I had no trouble finding my place – I was unlikely to confuse international tax lawyers with the costumed crowd that channeled Alice in Wonderland meets the Flash. Once the tax conference got underway, though, I began to contemplate similarities between the two events, in particular, the meaning and role of reality and its construction. . . Continue reading “International tax meets Japanese anime”

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?”

Call for Papers: Applied Feminism and Intersectionality: Examining Law through the Lens of Multiple Identities

By: Francine J. Lipman

The Center on Applied Feminism at the University of Baltimore School of Law seeks paper proposals for the Tenth Anniversary of the Feminist Legal Theory Conference. We hope you will join us for this exciting celebration on March 30-31, 2017. 

imgres
Continue reading “Call for Papers: Applied Feminism and Intersectionality: Examining Law through the Lens of Multiple Identities”

Hemel and Maynard Push Boundaries of Equity in Recent Workshops

As part of its summer workshop series, Ohio State’s Moritz College of Law invites junior scholars to present works-in-progress.  This summer, we had the pleasure of hosting both Daniel Hemel, an assistant professor at the University of Chicago Law School and Goldburn Maynard, an assistant professor at the University of Louisville Brandeis School of Law.  Both junior tax scholars are challenging the ways in which tax policy makers think about equity in the context of distributive justice.

Maynard, whose work-in-progress finds its intellectual genesis in Murphy & Nagel’s The Myth of Ownership and Reuven Avi-Yonah’s “The Three Goals of Taxation,” focused on the prominence of everyday libertarianism in tax litigation and policy making.  Tax’s redistributive function, he asserted, should be tethered to equality rather than to economic liberty or to efficiency.  While acknowledging that “equality,” could mean different things to different people, Maynard concentrated on equality of income or wealth, rather than on more difficult-to-quantify forms, such as equality of opportunity. Although he did not explicitly raise it, Maynard seems also to be contemplating an eventual challenge to the sufficiency of vertical equity as a measuring stick in tax policy.  At this point, though, his goal is primarily to widen the discussion.

Hemel, too, is thinking of distributive justice in broader terms.  Using the home mortgage interest deduction as a case study, Hemel and Kyle Rozema, a postdoctoral fellow at the Northwestern-Pritzker School of Law, argue that labeling a tax provision as “progressive” or “regressive” should not be done in isolation.  Instead, scholars and policy makers should look both at the operation of a provision within the context of the Code and at the reallocation of revenue generated by a provision’s amendment or repeal.

For example, households in the top 1% of the income distribution tend to benefit more from the mortgage interest deduction than households in the bottom 99%. On the other hand, the presence of the deduction in the Code counter-intuitively causes the top 1% to bear a larger share of the total tax burden than they otherwise would.   In other words, Hemel and Rozema assert that while the deduction looks regressive when viewed in isolation, it actually increases progressivity overall in the Code.  (This, of course, is a function of what percentage of a taxpayer’s income is devoted to mortgage interest in a skewed income distribution, so the result might be different if Hemel and Rozema dug deeper into the distribution rather than focusing on the top.)  Regardless, Hemel and Rozema seem to be proving Maynard’s implicit point that traditionally “equitable” policies do not necessarily promote equality of income or wealth.

Perhaps more interesting is Hemel and Rozema’s argument that the progressivity or regressivity of an amendment to the Code cannot be determined without also considering Congress’s use of the resulting revenue.  For example, if Congress were to repeal the mortgage interest deduction and write equal-sized checks to each household, the distributional consequences would be more progressive than if additional revenue were used to reduce all taxpayers’ liabilities proportionately.  Here, Hemel and Rozema’s argument brings to mind earlier work by Lily Batchelder and others on the use of refundable credits versus non-refundable credits or deductions.  And notably, like Maynard’s work in progress, Hemel and Rozema’s work is pushing policy makers to look deeper into equity, questioning stock assumptions and asking how the concept can be made meaningful in practice and not just on paper.

That the traditional tax policy cannon (if there is such a thing) would breed restiveness in junior scholars at a time of political and class unrest should come as no surprise.  Maynard’s assertion that equality has separate meaning and import, and Hemel’s and Rozema’s argument that tax analysis is only half of the picture push tax policy scholarship in a direction that is more pragmatic, building a bridge of sorts between what students of tax policy learn and what is happening in government.  It will be interesting to see what the future holds both for these young scholars and for the world of tax policy more generally.

@ProfHoffer

Improving Tax Compliance in a Globalized World

By Jennifer Bird-Pollan

I have spent the past two days in the beautiful “free city” of Rust, Austria.  (Among other things, Rust is known as a haven for storks, including those in the photos below.  Most buildings in the old town have stork nests on their roofs.)

I am in Rust to attend a conference organized by the Institute of Austrian and International Tax Law of the Vienna University of Economics and Business.  The Institute organizes a conference in Rust every year using the same model.  Organizers first issue a call for contributors, each of whom writes a country report on the year’s topic, answering a series of questions prepared by Institute staff, describing the situation in his or her home country.  Contributors and participants include representatives of tax authorities, tax law and economics academics, practicing tax attorneys and accountants, and representatives of international organizations, among others.  The reports are circulated to participants in advance of the conference, and all are expected to prepare themselves by reading the country reports before arriving.  The two day conference then consists of the reporters presenting 3 minute “input statements” on a variety of topics, followed by discussion among the almost one hundred participants.  Here we are discussing an input statement from the Russian reporter, Professor Danil Vinnitskiy:

Rust Conference

As indicated in the title of my post, this year’s topic is tax compliance, and it has been fascinating to hear about the approaches of various governments including Kazakhstan, Indonesia, Norway, Russia, Germany, Nigeria, Croatia and many more.  Discussions have covered questions including the measurement of the tax gap, FATCA and other information exchange programs, inter-agency information exchange, and withholding procedures, among other things.  For those interested in learning more about these matters, the reports will ultimately be published in the coming months.

Professors Michael Lang and Alexander Rust host the conference, along with others from the Institute, and they understand that hard conference work should be accompanied by some opportunities to talk informally with other participants.  The informal events typically include a local wine tasting, a sunset dinner boat trip on the lovely Neusiedlersee, and many coffee breaks with opportunities for discussion with others.

Rust dinnerRust sunset

Having attended the Rust conference twice now, I can highly recommend it to others.  Keep an eye out for the call for participants for the 2017 conference!

Tax Times @ ABA Section of Taxation

By Francine J. Lipmanth

Supervising Editor Professor of Law Linda Beale and her team of outstanding ABA – Tax Section editors, Anne Dunn and Isel Pizarro, and staff have put together an exceptional June 2016 issue of the digital Tax Times. Features include . . . Continue reading “Tax Times @ ABA Section of Taxation”