ACTC Letter Requesting a Variance for Tax Guidance

By: Leandra Lederman

Sam Brunson previously blogged about President Trump’s Executive Order of January 30, 2017, “Reducing Regulation and Controlling Regulatory Cost,” which requires an agency to identify two regulations to eliminate for every new regulation it issues. (Sam also has related posts here and here). As Sam stated, the Executive Order burdens taxpayers, who benefit from the public guidance Treasury regulations provide.

On March 23, the American College of Tax Counsel (ACTC) sent a letter to the Secretary of Treasury, Hon. Steven Mnuchin, and the Director of the Office of Management and Budget, Hon. Mick Mulvaney, “respectfully request[ing] that the Administration consider the unique role that the tax law plays in the lives of every American and provide the Treasury Department and the IRS with appropriate flexibility in issuing guidance that taxpayers and their advisors need in order to comply with the tax law.” The letter explains in part:

“By limiting the flexibility of Treasury and the IRS to issue such guidance, the Executive Order risks shifting the interpretive burden onto taxpayers, who must hire accountants, lawyers, and other advisors to guide them. . . . Moreover, by requiring Treasury and the IRS to identify two ‘deregulatory’ actions for each new guidance item, the Executive Order risks imposing additional burdens on taxpayers if it results in the elimination of existing rules that taxpayers and their advisors have come to rely on.”

I hope that Secretary Mnuchin and Director Mulvaney are receptive. As the ACTC’s letter states, even while simplification efforts are underway, “it is critical for taxpayers and their advisors to have the guidance needed to comply with the tax law as currently in effect.”

Did Rachel Maddow Break the Law? #TrumpTaxReturns

By Sam Brunson

Last night, Rachel Maddow dropped a bombshell: reporter David Cay Johnston had a leaked copy of Donald Trump’s 2005 tax return, and he shared it on her show.

Okay, maybe it wasn’t entirely a bombshell; in our leakhappy environment, it was almost inevitable that we’d eventually see some of Trump’s returns. And this barely counts as a return: it’s just his Form 1040 from 2005 (that is, the first two pages of a return). When I grade voluntary presidential candidate tax disclosures, one year’s Form 1040 realistically gets you a D+; the 1040 says how much you ultimately paid in taxes, but very little more than that. (For example, you can see that Trump had itemized deductions of just over $17 million, but you can’t tell what itemized deductions he took. I mean, is it mortgage interest? state and local taxes? charitable contributions? some combination? Without the full return, we have no way of knowing.) Continue reading “Did Rachel Maddow Break the Law? #TrumpTaxReturns”

The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?

By David Gamage

On Monday, the House Republicans finally revealed their draft bill to “repeal and replace” the Affordable Care Act (#Obamacare or #ACA). The bill is titled the American Health Care Act, and commentators have been referring to it as either the #AHCA or #Trumpcare.

To assess the bill, it is helpful to think of it as consisting of four primary buckets:

  1. ending many of Obamacare’s tax provisions (read: large tax cuts for the very wealthy);
  2. phased-in cuts to Medicaid funding and scheduled devolution of Medicaid to the states (read: eroding the health safety-net program for the poor);
  3. transforming Obamacare’s other major health subsidies from being based mostly on income and health costs to being based more on age (read: the implications of this are actually less straightforward than what much of the commentary suggests, but that is a topic for another day); and
  4. other changes to Obamacare’s insurance market regulations (the subject of today’s blog post).

In this blog post, I will focus on the fourth bucket—the changes to Obamacare’s insurance market reforms other than the changes to the subsidies. Time permitting, I hope to write future blog posts on some of the other buckets.

What is most striking about the AHCA’s insurance market changes is how they keep the vast majority of Obamacare’s reforms in place. Right-wing groups have thus taken to calling the AHCA “#ObamacareLite”. Yet I consider this a misnomer. A more accurate label would be #ObamacareCrippled.

The AHCA’s changes do not really water down Obamacare, as the intended slur of “ObamacareLite” implies. Rather, the AHCA’s changes would likely cause Obamacare‘s framework for regulating the individual market to fall apart. If the AHCA bill were to be enacted in its current form, the result would likely be adverse-selection death spirals. The only real hope for saving the individual market would be for state governments to step up with new state-level regulations for supporting insurance markets within each state.

Continue reading “The Insurance Market Regulations in the Republicans’ Health Care Bill: Crippling Obamacare, or Passing a Hot Potato to State Governments?”

Past Moratoria on Tax Guidance and Regulations(?)

By: Sam Brunson

cch_standard_federal_tax_printOn my previous post talking about the the IRS’s announcement that it was putting a moratorium on issuing new regulations and formal guidance, a commenter asked if it was such an odd thing for a new Administration to temporarily pause guidance. After all, who wants to issue guidance before the new Administration’s people are in place and agenda is set, lest the new Administration change its priorities and positions in the coming months?

I didn’t remember any such (formal, at least) pause in 2009, but, when I got home, I decided to look back a few years. I looked at new regulations and revenue rulings in the first month of the Obama, George W. Bush, Clinton, and Reagan presidencies (I didn’t bother with George H.W. Bush, because that was a Republican to Republican switch). Also, because we don’t know how long the current limitations on regulations and other guidance will last, I also expanded my search of revenue rulings for the first three months of the new administrations.[fn1] Continue reading “Past Moratoria on Tax Guidance and Regulations(?)”

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.

The (Near) Future of Treasury Regulations

cfrToday’s Tax Notes reports[fn1] that the IRS has announced that it will not release pretty much any new formal guidance (including revenue rulings and revenue procedures) for the foreseeable future.[fn2]

Why not? A confluence of an Executive Order and a January 20 memorandum. The EO, “Reducing Regulation and Controlling Regulatory Cost,” requires that, for every new regulation issued, two existing regulations be eliminated.

The January 20 memorandum further prohibits agencies from sending regulations to the Federal Register until they’ve been reviewed by an agency or department head appointed by Trump. Continue reading “The (Near) Future of Treasury Regulations”

What Would Happen if the Johnson Amendment Were Repealed?

By Benjamin Leff

Donald Trump recently repeated his campaign promise to “totally destroy” the Johnson Amendment. The Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that forbids tax-exempt charities (including most churches) from “interven[ing] in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Only Congress can change the Tax Code, and, as Daniel Hemel recently pointed out, congressional Republicans just re-introduced the Free Speech Fairness Act, a bill to permit some limited campaign-related speech by the leaders of 501(c)(3) organizations, including churches. I’ve written previously in support of this legislation as an “adequate solution” to provide a little extra wiggle room to protect the speech rights of charities without making significant changes to the way campaigns are currently financed. Hemel points out that the Free Speech Fairness Act doesn’t come close to totally destroying the Johnson Amendment, but is more like a “de minimis carveout.”

But, rather than talk about the relatively sensible Free Speech Fairness Act, I want to predict what would happen if Donald Trump actually succeeds in “totally destroying” the Johnson Amendment. In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?

Because a charity must be organized and operated primarily for charitable purposes (although the word used in the statute is “exclusively”[1]), and intervening in campaigns is not a charitable purpose, new charities could not be created for the purpose of engaging in campaign speech or making political contributions. But existing charities could divert a significant quantity of their funds to political campaigns if they so chose. The question of how much is hard to answer without new guidance, but it would be plausibly reasonable (though aggressive[2]) for a charity to make 49% of its expenditures in any year as campaign contributions, since that leaves 51% of its activities to satisfy the requirement that it is engaged “primarily” in activities that accomplish its exempt purposes.

How would that change the way campaigns are financed in the US? Well, if people could find charities willing to accept their contributions and then spend them on political contributions, taxpayers could transform political campaign contributions from nondeductible expenditures to tax-deductible charitable contributions. This would work for corporations as well as individuals. The charities would then have to limit their political spending to 49% of their overall spending. The charities best suited for this type of intermediation of campaign spending are large existing public charities.[3] For example, a university, like the one I work for, could choose to make political contributions on behalf of its donors, if it wanted.

If I were involved in fundraising at my university, I would immediately suggest that it create a fund called the Alumni for Kamala Harris for President Fund and the Alumni for Paul Ryan for President Fund (just a guess for 2020). For every tax-deductible contribution of $100 to the fund, $60 would go to the candidate or to an independent PAC that supports the candidate, and $40 would go towards scholarships at the University. There are some legal issues that the University would have to maneuver to make this program work, and there might be some blowback from stakeholders who were upset about the University getting involved in politics, but the program would not be illegal or impossible.   As discussed below, for donors in the 39.6% tax bracket, a tax-deductible contribution of $100 costs about the same to them as a non-tax-deductible contribution of $60, so why not send $40 to scholarships at your alma mater, if it’s free (or, technically, paid for by the government)?

In the 2016 presidential election, total spending by Hilary Clinton, Donald Trump, the Democratic and Republican parties, and all Super PACS was just over $2 billion. There are almost certainly enough public charities in this country that would be tempted to raise funds in the manner described above that all $2 billion could be funneled through them, making all campaign spending tax-deductible for the donor.

So, would that be good or bad? Obviously, it has very little to do with whether churches or their leaders can or cannot endorse candidates from the pulpit. The question is whether it would be good or bad policy to permit all campaign contributions — whether to candidates directly or to independent PACs or political parties — to be made on a tax-deductible basis. Generally, a tax deduction functions like a government subsidy. On the one hand, subsidizing all campaign spending doesn’t seem so bad. Campaigns are important for democracy; why shouldn’t the government subsidize them? Under current law, the playing field is made level by denying tax deduction to everyone who makes a political contribution or spends money to elect a candidate. At first glance, it seems like the playing field would be equally level if everyone gets a tax deduction for similar spending. As long as everyone is treated the same, it seems like a fair system.

But everyone is not treated the same when political campaign contributions and campaign spending is tax deductible. First of all, most political campaign contributions are made by very wealthy taxpayers, and so subsidizing political spending is a subsidy for the wealthiest taxpayers. For example, the conservative Koch brothers were reported to have planned to spend almost 900 million dollars in the 2016 presidential election. The liberal donor Thomas Steyer reportedly spent over 86 million dollars. Even if the government subsidized such spending in an equal way, say 10 cents for every dollar spent, this subsidy would be unfair. The government would magnify the Koch brothers’ voice by 90 million dollars, Steyer’s voice by 8.6 million dollars and most Americans voice by nothing or almost nothing, simply because they make small contributions. Most people would think that even a subsidy that was delivered proportional to spending would probably be bad policy.

But a tax deduction is not proportional to money spent, because our Tax Code is not proportional. Tax deductions (including the deduction for charitable contributions) treat wealthier donors better than less wealthy donors. First, deductions for charitable contributions are only available to taxpayers who “itemize” their deductions. Under the current income tax system, 70 percent of taxpayers do not itemize; instead they take the standard deduction or do not owe any tax. If you take the standard deduction, your taxes remain exactly the same whether you make charitable contributions or not. If campaign contributions could be deducted like charitable contributions, then non-itemizers would not have any tax benefit from making campaign contributions, while itemizers would. Itemizers are disproportionately found among the highest-income taxpayers.

Second, the amount of benefit one receives from a deduction is equal to one’s marginal tax rate. Since tax rates are progressive, that means that higher-income taxpayers get more benefit from deductions than lower-income taxpayers. For example, single taxpayers who have taxable income over $415,050 pay tax at a 39.06% rate on their income that exceeds that threshold. That means that the ability to deduct a political contribution is worth 39.06 cents for every dollar contributed. It is like a federal subsidy of almost 40 percent to wealthy political donors. For single taxpayers (who itemize) with taxable income under $9,275, the comparable subsidy is only 10 cents for every dollar contributed. That’s what tax scholars generally call an “upside down” subsidy.

So, not only is deductibility a government subsidy for political spending that would go disproportionately to wealthy taxpayers, it would go to them in disproportionate amounts, providing a greater subsidy per dollar contributed to wealthier taxpayers than to less wealthy ones. It’s hard to imagine that there are many people who would interpret that dramatic tilt of the playing field in favor of wealthy donors a good thing. Not even Trump could sell a policy like that with a straight face.

[1] See Treas. Reg. 1.501(c)(3)-1(c)(1)(“An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).” emphasis added.)

[2] It’s an aggressive position at least in part because the second sentence of Treas. Reg. 1.501(c)(3)-1(c)(a) states, “An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” A lot of negatives in that sentence, but it appears to interpret the opposite of “primarily” as “an insubstantial amount.” The idea that 49% of an organization’s activities is “an insubstantial part” is an aggressive position, to say the least.

[3] This post has been modified from its original form. It was originally published proposing that donor-advised funds would be the simplest vehicle for making tax-deductible campaign contributions. But, thanks to post-publication feedback about the likelihood that such use of donor-advised funds would still be improper even after a full repeal of the Johnson Amendment, I have changed the proposed vehicle for tax-deductible campaign contributions to existing public charities that are not donor-advised fund hosts.

Newspapers and the Total Destruction of the Johnson Amendment

By Sam Brunson

Yesterday at the National Prayer Breakfast, Donald Trump promised to “get rid of and totally destroy the Johnson Amendment.”

In case you’re unfamiliar with the name “Johnson Amendment” (and I kind of hope you are—it’s a stupid name), that refers to the phrase in section 501(c)(3) that prohibits tax-exempt organizations from endorsing or opposing candidates for office. It was proposed by Senator Lyndon Johnson in 1954, and inserted into the tax code with little fanfare and no legislative history.

There’s a lot that can (and, in fact, has) been said about Trump’s proposal, which follows up on a campaign promise he made, apparently repeatedly. I wouldn’t doubt if we return to it a few times here at Surly. But I just wanted to point out one potential consequence: Continue reading “Newspapers and the Total Destruction of the Johnson Amendment”

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”

A New Approach to Presidential Tax Disclosure [Updated]

By: Sam Brunson

I’ve written a couple times about the various presidential candidates’ tax return disclosure and nondisclosure. Ultimately, I concluded that, unless Congress mandates disclosure, it’s not going to happen.

It turns out that I may have been wrong.

No, I don’t mean that the disclosure norm is going to reassert itself. I do mean, though, that requiring presidential candidates to disclose their tax returns may not require Congressional action after all.  Continue reading “A New Approach to Presidential Tax Disclosure [Updated]”