On February 28, Prof. Stephanie McMahonfrom 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.
On February 1, the Indiana University Maurer School of Law welcomed Prof. Jake Brooksfrom 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””→
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.
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.
The question that drove us was extent to which Sec. 199A incentivizes shifts to independent contractor classification. Some key points: (1) It’s not just about 199A itself. We think that once tax interacts with non-tax considerations, the picture becomes more complicated…2/?
(3) It’s unclear how much incremental advantage the Sec. 199A "carrot" gives firms in keeping workers quiet when they are have been classified as ICs. Firms already have non-tax ways to mute worker challenges and, moreover, have used them. 4/?
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.
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 ofChild 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.
Tax-gift giving this holiday season just got so much easier!! Look what arrived just in time to celebrate the end of 2017! The FIRST in a series of subject-matter volumes of US Feminist Judgments is the Feminist Judgements: Rewritten Tax Opinions.
Legislative drafting conventions are conservative, and it is traditional for a bill to have a long title which describes the purposes of the bill in technical detail, and then to include in the first section a short title which provides a more user friendly name. The short titles of Acts used to be fairly straightforward (e.g., the “Revenue Act of 1939”) but by the late 70s or early 80s, they tended to get cute and political, so now we have names like the “PATRIOT Act” and the “Affordable Care Act.”
The tax bill just passed by both houses of Congress introduces a new and somewhat unprecedented variation. There is no short title. There used to be: the “Tax Cuts and Jobs Act” (TCJA). However, at the last minute, it was stripped out of the bill because the Senate Parliamentarian ruled that it was extraneous to the bill’s purpose of affecting revenues, which is what a reconciliation bill is limited to. Hard to argue with that – the name of the law does not have an effect on revenues.
As a result, it would not be accurate to refer to this piece of legislation as the TCJA. Opponents have been referring to it as the Trump Tax Scam, and likely will continue to do so. It is probably too much to ask the media and tax advisors to refer to it that way, since that does seem overtly political. The “2017 Budget Reconciliation Act” perhaps would work (BRA for short). Several pieces of legislation enacted through reconciliation procedure have been called “Omnibus Budget Reconciliation Act of 19xx” so there is precedent. So calling it a Budget Reconciliation Act is a correct generic description in the absence of an official short title. I believe that calling it a tax reform act would also be political, since it falls far short of reform. Budget reconciliation is perhaps as neutral as one can get. An additional argument for this is that the bill contains not only tax provisions but also provisions on Alaska drilling, which are not tax related, but are related to budget reconciliation.
The Tax Cuts and Job Act’s conference bill includes section 13307, titled “DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH SEXUAL HARASSMENT OR SEXUAL ABUSE.” Fellow Surly blogger Sam Brunson blogged about an earlier version of this provision, which obviously reflects the recent, widely publicized revelations of sexual harassment and sexual assault that began with the Jody Kantor & Megan Twohey exposé of Harvey Weinstein in early October and was followed by a floodgate of allegations spanning a wide range of industries. Unfortunately, this tax provision, as drafted, is less than clear and could potentially have perverse—perhaps unintended—effects.
The provision seems intended as a policy-based provision rather than much of a revenue-raiser; it was one of very few things in the conference bill scored as raising less than $50 million over the entire 2018-2027 budget window. And, in the press release accompanying the predecessor of this provision, the Settlement Tax Deductions are Over for Predators Act (the STOP Act), which was introduced by Rep. Ken Buck (R-Colo.), Rep. Buck stated, “‘When we allow companies to deduct sexual assault and sexual harassment related settlements, we’re asking the American taxpayer to subsidize hush money payments that cover-up sexual misconduct.’”
But what exactly does the provision disallow? The principal language in the conference bill (the material other than the effective date and relettering) is a new subsection added to Code section 162 that reads:
“PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE.—No deduction shall be allowed under this chapter for—
“(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
The conference tax bill follows both the House and the Senate bills in drastically increasing the standard deduction (from current law’s $13,000 in 2018 to $24,000). At the same time, it gets rid of personal exemptions. As Stephanie Hoffer pointed out eight months ago, eliminating personal exemptions would essentially increase taxes on families of four or more people; the more children a family had, the bigger its tax increase.
To fix that problem, the bill doubles the child tax credit from $1,000 to $2,000 per child. In addition, to get Marco Rubio’s vote, the bill provides that up to $1,400 of each child tax credit is refundable.