Call for Papers: “Reshaping Work in the Platform Economy”

By: Diane Ring

Last October, the international conference “Reshaping Work in the Platform Economy” was held in Amsterdam. I blogged about the two-day event that explored a wide range of legal, business and social issues here and here.  The call for papers for the Fall 2018 conference (October 25 & 26, 2018, Amsterdam) has just been issued:

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Stephanie McMahon, “Tax as Part of a Broken Budget: Good Taxes are Good Cause Enough”

By: Leandra Lederman

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Left to right: David Gamage, Leandra Lederman, Stephanie McMahon, Matt Metz (JD/MPA student)

On February 28, Prof. Stephanie McMahon from 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.

Given the importance of tax rulemaking and the difficulties the IRS has suffered with its well-known budget cuts, it is very nice to see a paper defending Treasury’s rulemaking strategy. Moreover, Stephanie’s argument is creative and thoughtful. However, the argument seems to depend on regulations being a critical part of the revenue-raising process, as the need for revenue is what Stephanie relies on to justify application of the good-cause exception. But are regulations needed for that? In explaining the budget process, Stephanie’s paper points out that regulations are not scored as part of that process. I think she agrees that tax statutes can raise revenue even in the absence of regulations. Instead, she argues that regulations help effectuate, albeit imperfectly, Congress’s scoring of the tax legislation. But some Internal Revenue Code sections do not expressly call for regulations. Others do, but some of the latter never actually see regulations promulgated. Yet, the tax laws are applied despite these “spurned delegations.” And given President Trump’s anti-regulation Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs, we may see more tax statutes operating without regulations. Continue reading “Stephanie McMahon, “Tax as Part of a Broken Budget: Good Taxes are Good Cause Enough””

PyeongChang 2018!

I love the Olympics. Like, a lot. I mean, I realize that hosting the Olympics is basically a gigantic financial sinkhole. And I understand that the Olympics aren’t part of a massive geopolitical power struggle anymore. But the athleticism! the competition! the near-perfect score on a third run, after you lost a ski on your first two! I love it.

And, of course, I love the tax aspect to the Olympics, a tax aspect that has changed significantly for the last two. See, medalists don’t just get a valuable medal and an adorable stuffed tiger: the U.S. Olympic Committee pays Olympians $37,500 for a gold, $22,500 for a silver, and $15,000 for a bronze.

And, since the Rio Olympics in 2016, (most) medalists don’t have to pay taxes on that prize money. Continue reading “PyeongChang 2018!”

Taxing R2-D2? ABA Tax Section Panel on Automation and AI

Kerry Ryan
Associate Professor
St. Louis University School of Law

I had the pleasure of attending the midyear meeting of the ABA Tax Section this past weekend in San Diego. The Tax Policy & Simplification committee organized an interesting panel entitled: “Taxing R2-D2: How Should We Think About the Taxation of Robots and AI.” The panel was organized and moderated by Surly’s own Leandra Lederman, and panelists included Shu-Yi Oei (Boston College), Roberta Mann (Oregon Law), and Robert Kovacev (Steptoe & Johnson LLP).

For those of you who read Shu-Yi’s post, you know that she is “deeply skeptical” of the “robot tax” frame. At best, it is misleading—no one is attempting to impose a tax on a “robot” (whatever that is?) per se. As Robert Kovacev succinctly put it: “robots don’t pay taxes, people pay taxes.” The key question is which people: owners, workers, and/or consumers? Roberta linked this question to the long-standing debate about who ultimately bears the burden of the corporate income tax.

At worst, the “robot tax” terminology captures (and perhaps amplifies) the fear (“the robots are coming!”) and angst driving much of this discussion. The underlying concern relates to the potential negative impact on labor of increased utilization of technology/artificial intelligence (AI)/automation in the production process. Experts disagree about whether, over the longer term, automation will reduce the number, or merely the type, of human workers. The unanswered question is whether this is just the next in a long line of technological shifts in the economy dating as far back as the Industrial Revolution, or whether AI/machine learning truly represents a technological tipping point.

What is clear is that the transition to this new automated workplace may lead to worker displacement (particularly for those in manual/routine jobs). Mass unemployment could negatively impact the tax base—fewer workers mean fewer taxpayers. Notice that any revenue loss would hit at the same time as funding demands increased for re-training and/or social protection programs (existing and/or proposed universal basic income) for displaced workers.

Assuming you believe there is a problem(s), what is the policy prescription? While most of the panelists agreed that tax has a role to play here, they disagreed as to the contours of that role. Should we plug the hole in the income tax base by shifting more of the tax burden onto capital, as opposed to labor? Do we attempt to tax work completed by robots in the same manner as comparable work by employees (see Bill Gates proposal)? Should we raise the overall level of taxation (under existing or new tax structures)? Do we view automation as imposing negative externalities on the labor market and impose some type of Pigouvian tax? Should we attempt to slow the pace of technological development, rather than workplace implementation, by reducing either direct funding or tax incentives for R&D and innovation (see South Korea)?

Many interesting questions with no easy answers. At the very least, we must resist allowing zeitgeist to drive the policy response, while at the same time affirming the legitimacy of the underlying concerns and working to minimize their negative consequences on workers and their families.

IU Tax Policy Colloquium: Brooks, “The Case for Incrementalism in Tax Reform”

By: Leandra Lederman

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Left to right: Jake Brooks, Leandra Lederman, Bill Popkin, David Gamage, Tim Riffle

On February 1, the Indiana University Maurer School of Law welcomed Prof. Jake Brooks from Georgetown Law School as the second speaker of the year in our Tax Policy Colloquium. Jake presented an early draft of a paper titled “The Case for Incrementalism in Tax Reform,” which led to a lively and interesting discussion about what incrementalism is, what constitutes fundamental reform, how politics may affect the making of tax policy, and whether and how tax law differs from other fields of law.

The paper, which is not yet publicly available, argues that “fundamental tax reform,” while sometimes necessary, should not generally be the goal of tax policy, and that instead, policymakers should take an incremental approach to changing tax laws. “Incrementalism” has a long history in political science, and was first described by Charles Lindblom in an influential 1959 article, “The Science of Muddling Through.” In general, Lindblom’s approach in that article was to reject the urge to use a formal method that involves clarifying the principal goals up front, identifying the means to achieve them, and then analyzing every relevant factor in the decision. Lindblom instead advocated the use of a more casual method that he termed “successive limited comparisons,” which ignored important possible outcomes or alternatives and did not involve distinguishing means and ends. (Page 81 of Lindblom.) Lindblom argued that this “muddling through” approach was not only what was actually practiced by administrators, but also a method for which they need not apologize because administrators are less likely to make serious and lasting mistakes if they proceed through small, incremental changes (pp.86-87). As Jake acknowledges, Lindblom wrote at a time with much more limited ability to model and process large quantities of empirical data. He notes that incrementalism has continued to be an important theory in the literature. Despite technological advances, we cannot see the future, and there remain limits to what empirical data can help us predict.

Jake’s argument is driven in part by arguments in favor of tearing the Internal Revenue Code out by its roots and starting over. I agree with Jake that such an approach seems extremely risky. Policy driven by rhetoric and “horror stories” risks being ill-conceived, hasty, driven by political rent-seeking, and even destructive, as I have written about in the context of IRS reform. But does that necessarily mean that legislative tax changes should take a Lindblom-style incremental approach? Continue reading “IU Tax Policy Colloquium: Brooks, “The Case for Incrementalism in Tax Reform””

Tax Cuts and Jobs Act: §§ 1221(a)(3)/1235 Disconnect

Deborah A. Geier
Professor of Law, Cleveland-Marshall College of Law, Cleveland State University

Does the sale of a patent by its creator create capital or ordinary gain? Prior to the legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA) enacted in late December, we had a clear answer: long-term capital gain (with some statutory limits). The TCJA has muddied the water significantly.

Prior to the TCJA, patents were not listed in § 1221(a)(3), which has long excepted self-created copyrights and self-created literary, musical, and artistic works from the definition of “capital asset” (with an elective “exception to the exception” for musical compositions in § 1221(b)(3), thanks to the Country Music Association). In addition, transferees of such assets also hold them as ordinary assets if their basis is determined by reference to the creator’s basis. The § 1221(a)(3) exception is premised on the analogy to labor income; although property is transferred, the property was created through the personal effort of the creator. While the same can be said of self-created patents, Congress provided them favorable treatment not only by failing to include them in the § 1221(a)(3) list but also by providing additional favorable rules in § 1235.

Section 1235 provides that the transfer of all substantial rights to a patent or an undivided interest in all substantial rights (other than by gift or bequest) to an unrelated party by certain “holders” generates long-term capital gain, even if the patent was held for less than one year and even if the consideration may look like (ordinary) royalty payments because contingent on (or measured by) use of the patent. The “holders” that can benefit from these favorable rules include patent creators (whether amateurs or professional inventors), as well as buyers of a patent from the inventor before the invention covered by the patent is reduced to practice, even if the buyer is in the business of buying and selling patents and even if he holds patents for sale to customers in the ordinary course of business, so long as the buyer is not the inventor’s employer. In Pickren v. U.S., 378 F.2d 595 (5th Cir. 1967), the Fifth Circuit extended application of § 1235 to unpatented secret formulas and trade names, though the taxpayers failed to transfer all substantial rights to the property and thus were denied capital gains treatment under § 1235.

Section 3311 of the House version of the TCJA would have repealed the § 1221(b)(3) election to treat self-created musical compositions as capital assets and—more important to the current discussion—would have added the words “a patent, invention, model or design (whether or not patented), a secret formula or process” before “a copyright” in the § 1221(a)(3) exception to the definition of a capital asset. Thus, a patent held by its creator or by a taxpayer whose basis is determined by reference to the creator’s basis would be an ordinary asset. Consistent with this change, § 3312 of the House bill would have repealed § 1235.

The Senate version of the TCJA contained neither provision. Continue reading “Tax Cuts and Jobs Act: §§ 1221(a)(3)/1235 Disconnect”

More on Section 199A and Worker Classification (**Threaded Tweet Alert!)

Shu-Yi Oei

Last Friday, Diane and I posted a new paper called “Is New Code Section 199A Really Going to Turn Us All into Independent Contractors?” on SSRN. This was something that started as a blog post but then grew too long and so became a short paper. We plan to develop the ideas in it more robustly in future work.

On Saturday, I made one of those goofy academic tweet threads summarizing the paper, and then it occurred to me that I really liked my goofy tweet thread! Therefore, I’ve taken the liberty of posting the tweets here for the marginal reader who is just interested enough in the topic to read the tweets but possibly not interested enough to read the actual paper.

Diane and I look forward to continuing conversation on this.

Is New Code Section 199A Really Going to Turn Us All Into Independent Contractors? (New Paper on SSRN)

By: Diane Ring

Shu-Yi and I started a blog post on new Section 199A that morphed into a seven-page essay that ultimately found its proper home on SSRN. Here is the abstract:

Is New Code Section 199A Really Going to Turn Us All Into Independent Contractors?

Abstract

There has been a lot of interest lately in new IRC Section 199A, the new qualified business income (QBI) deduction that grants passthroughs, including qualifying workers who are independent contractors (and not employees), a deduction equal to 20% of a specially calculated base amount of income. One of the important themes that has arisen is its effect on work and labor markets, and the notion that the new deduction creates an incentive for businesses to shift to independent contractor classification. A question that has been percolating in the press, blogs, and on social media is whether new Section 199A is going to create a big shift in the workplace and cause many workers to be reclassified as independent contractors.

Is this really going to happen? How large an effect will tax have on labor markets and arrangements? We think that predicting and assessing the impact of this new provision is a rather nuanced and complicated question. There is an intersection of incentives, disincentives and risks in play among various actors and across different legal fields, not just tax. Here, we provide an initial roadmap for approaching this analysis. We do so drawing on academic work we have done over the past few years on worker classification in tax and other legal fields.

GOP 2017 Tax Act Forces Nonprofits to Pay UBIT on Some Fringe Benefits

By: Philip Hackneyroad-3036620_1280

In the new tax act of 2017, Congress imposed an unrelated business income tax on transportation, parking, and athletic facility fringe benefits that a nonprofit provides to its employees. I write because I suspect there are universities or hospitals or other large nonprofits out there (pension funds maybe) that offer these types of fringe benefits that are unaware that they must pay UBIT on the total value of these benefits at the end of the year. The law went into effect for taxable years starting January 1, 2018.

In Section 13703 of the bill, Congress promulgated the following new rule: UBIT “shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises
athletic facility (as defined in section 132(j)(4)(B)).” Continue reading “GOP 2017 Tax Act Forces Nonprofits to Pay UBIT on Some Fringe Benefits”

(Un)Happy New Year

Today is the first day of calendar/tax year 2018. Today is also the first day that taxpaying American families with children who do not have a Social Security number will no longer qualify for any amount of Child Tax Credit (CTC). IRC Section 24(h)(7). Certain members of Congress have for years been trying to target these working families and increase their already high effective income tax rate. Many of these families already pay federal income taxes at a higher effective tax rate than their U.S. citizen counterparts. I have blogged about this issue here and published scholarly articles about the oppressive “Illegal Tax” here, here, and here. Moreover many of them pay into Social Security and Medicare although they cannot qualify for any otherwise earned benefits. Fortunately, frontline advocates who support families, immigrants, and children have been successful pushing back against this oppressive goal until TODAY.

Continue reading “(Un)Happy New Year”