Diplomacy, or the Art of the Tax Deal 2.0?

The Republican-led passage of the Tax Cuts and Jobs Act may have evoked a Marx Brothers movie for some, but when it comes to international competition for the capital investment of foreign multinational enterprises (MNEs), the reform seems to fall squarely into President Trump’s 2016 campaign promise, “America First.”

After a decades-long rise of free trade agreements and the automation of manufacturing jobs, United States political sentiment seems to be shifting away from international cooperation.  (Hence the barrage of tariffs?)  The new law, rather than seeking to harmonize international taxation (which could decrease the outsized role of tax in decision-making), instead casts the United States as Rocky making a comeback in the global fight for capital investment.  In other words, from an America First perspective, efficiently allocating capital investment to create the most value for the global economy is less important than bringing that investment into the United States, even though it might be less productive here.  The reform’s tax competitive stance is likely to be politically palatable because most voters neither understand nor care that the Trump administration’s fight for a larger United States share of the worldwide economy might result in a smaller worldwide economy overall.

Indeed, foreign-based MNEs are likely to benefit from increased capital investment in the United States going forward.  At an event hosted on March 5 in Vienna by IFA Austria, one panelist noted that at least three large foreign manufacturers—Daimler, BMW, and Siemens—expect to see initial benefits in the hundreds of millions of Euros.  In fact, the United States reform has prompted the EU to request an OECD investigation of whether the new law violates international standards on harmful tax practices.

The United States’ forward-leaning stance is somewhat (or some might say almost entirely) unhinged from typically applicable diplomatic constraints, both formal and informal.  In particular, Congress seems to have disregarded potentially applicable WTO prohibitions on export subsidies. (For more on this point, read my OSU colleague Ari Glogower and others here and here.)   Given the United States’ long history of these types of violations (you may recall the DISC, the foreign sales corporation, and the extraterritorial income system), this new WTO fence-jump cannot easily be viewed as accidental.  Already several EU finance ministers have already lodged complaints about it with members of Congress  and the U. S. Treasury.

It is difficult, then, not to think that the new law was written in part to provoke a worldwide competitive response.  Particularly in light of the president’s move toward tariffs, the new tax law reads like a catch-us-if-you-can grab for capital.  Christian Kaeser, global head of tax for Siemens, described it as a “showcase of protectionism.”  German newspaper, Die Welt, ran an editorial headline that translates, “Europe Dreams of a Tax Fortress- Trump Acts.”   Ralf Kronberger, Head of the Department of Financial, Fiscal and Trade Policy at the Federal Austrian Economic Chamber, said of the EU, “We have to be in the game and create an attractive environment, and tax policy must contribute its share.”  He added that while countries like Austria may be forced to compete with the United States for capital investment, “tax and trade war are not beneficial for anyone.” (Would someone please tell that to the president?)

So how will Europe react?  Corporate tax policy in the European Union generally assumes that coordination within Europe and cooperation under BEPS will be sufficient to protect the tax base.  Coordination, though, may not be compatible with competition, which the new United States law seems deliberately designed to provoke.  Casually, tax folks here in Europe have been wondering aloud whether increased pressure to compete will further strain the effectiveness of the European Union’s effort to curb base erosion or whether it may put pressure on the alliance itself.  If nothing else, economists and political scientists should be having a moment.  The new law sets up a credible natural experiment for the observation of tax as a factor in capital mobility.  And if viewed as a tool to encourage renegotiation of trade deals and bilateral tax treaties, it is an exciting (frightening?) opportunity to see what happens when a world power brings a business approach to statecraft at a time when states cannot be as facile as businesses in their response.

Follow me on Twitter @profhoffer.

The Workability of Pike Balancing for Sales and Use Tax Collection Obligations

Hayes Holderness
Assistant Professor
University of Richmond School of Law

As covered in earlier posts (here, here, here, and here), the Supreme Court is currently considering the case of South Dakota v. Wayfair Inc., which calls into question the physical presence rule for sales and use tax collection obligations. This rule holds that a state cannot require a person to collect the state’s sales and use taxes unless that person has a physical presence in the state; the rule was justified as a way to prevent undue burdens on interstate commerce. On March 28th, Wayfair filed its brief with the Court laying out its argument for retaining the physical presence rule.

The arguments in Wayfair’s brief are mostly expected: that state and local sales and use tax systems are still too complex and varying to expand taxing authority to remote vendors, that the dollars at stake are relatively small and declining, and that the physical presence rule benefits small vendors who would otherwise be unable to meaningfully engage in interstate commerce. However, one section of Wayfair’s brief addresses the argument of many amici that the balancing test from Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), should replace the physical presence rule going forward. (Surly Blogger Adam Thimmesch has been at the forefront of these arguments.) Wayfair pulls no punches—it argues that Pike balancing would be “fundamentally unworkable for addressing the burdens of state sales tax collection,” i.e., that it would be unable to prevent undue burdens on interstate commerce in this context.

Continue reading “The Workability of Pike Balancing for Sales and Use Tax Collection Obligations”

IU Tax Policy Colloquium: Satterthwaite, “Optional Taxation: Survey Evidence from Ontario Microentrepreneurs”

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Left to right: Maicu Díaz de Terán, Tim Riffle, Emily Satterthwaite, Brian Broughman, Leandra Lederman, David Gamage, #taxprofbaby, Pamela Foohey, Austen Parrish

By: Leandra Lederman

On March 22, the Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Prof. Emily Satterthwaite from the University of Toronto Faculty of Law, who presented “Optional Taxation: Survey Evidence from Ontario Microentrepreneurs.” This interesting new paper is not yet publicly available.

The paper explores Canada’s “small supplier” exemption from value-added tax (VAT) registration. Canada’s exemption allows suppliers with less than CAD $30,000 of sales (turnover) in a year to avoid registering for and complying with the VAT unless they opt in. (This amount is not indexed for inflation, and Emily’s paper explains that this threshold is fairly low.) Although it may seem odd for someone to opt into a tax system, as Emily’s paper explains, some small suppliers have incentives to do so: if they buy supplies subject to VAT, they can offset that against VAT owed, and obtain a refund if VAT paid exceeds VAT due. In addition, some small suppliers may be encouraged by their VAT-registered customers to become part of a formal supply chain, because the VAT those customers pay on inputs is creditable. The downside of registering is the cost of doing so, which includes the requirement to file an annual return regardless of whether VAT is owed. Continue reading “IU Tax Policy Colloquium: Satterthwaite, “Optional Taxation: Survey Evidence from Ontario Microentrepreneurs””

Congratulations to Surly Blogger Sam Brunson!

As announced on Taxprof Blog today, Surly blogger Sam Brunson has been named the Georgia Reithal Professor of Law at Loyola University of Chicago School of Law. Sam’s work focuses on how tax law affects various groups of taxpayers, with a particular focus on investors and families. He also write on tax administration. Sam also has a book, entitled God and the IRS: Accommodating Religious Practice in United States Tax Law,  forthcoming at Cambridge University Press.

Congratulations, Sam!

Are Forty Percent of Tax Compliance Employees About to Get the Boot?

By Stephanie Hoffer, @prof.hoffer

New technology has the potential to completely change the face of tax law and accounting: that was the take-away from a recent installment of a tax and tech series organized by Professor Jeffrey Owens and Julia de Jong of Vienna University’s Digital Economy Taxation Network.   The roundtable on Governance Implications of Disruptive Technology assembled experts from Microsoft, PWC, think tanks, and the academy.

The session began with a staggering prediction that large companies will sack up to 40% of their tax compliance employees in coming years.  Why?  Experts anticipate that technological progress in data collection and algorithmic reporting will allow audit functions to be built directly into data collection and management.  This integration will allow governments to coordinate seamlessly with taxpayers by assuming the role of tax preparers whose reliance on algorithms largely eliminates the need for auditors.  Similarly, data technology will eventually obsolete VAT returns, an administrative headache for most of the globe and a major source of work for the accounting industry. Eelco van der Enden, a partner with PWC Netherlands, went so far as to predict the breakup of Big Four accounting within ten years as technology grabs the tax prep reins and renders auditing obsolete.

Disruptive technologies that leverage data also have the potential to revolutionize how we address the tax gap.  As van der Enden noted, “[d]ays are gone when you could create a bunch of bullshit” in a tax return to force regulators into a negotiation.  The ready availability of data from sources as disparate as taxpayer reporting, social media accounts, and even satellite pictures of the planet are poised to revolutionize business and tax transparency.  In addition, advances like quantum computing, when combined with what has been called a tsunami of data, will allow tax systems to handle an exponentially increasing amount of complexity.  Transfer pricing, for instance, will be a whole new ballgame with the advent of close-to-omniscient tech.  When (not if, but when) complexity no longer results in a loss of efficiency on the human side, tax administrations could see large gains from re-regulation in some cases.

As Harald Leitenmuller of Microsoft concluded about tax experts going forward, “[t]he future of your profession is to be a good data scientist who can leverage the knowledge hidden in the existing data.”  Congress and IRS, take note.

(Written with thanks to Fulbright Austria for supporting my work.)

IU Tax Policy Colloquium: Ring, “Silos and First Movers In the Sharing Economy Debates”

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Prof. Diane Ring

By: Leandra Lederman

On March 1, the Indiana University Maurer School of Law welcomed Surly’s own Prof. Diane Ring from Boston College Law School as the fourth speaker of the year in our Tax Policy Colloquium. Diane presented a new paper, which I believe is not yet publicly available, titled “Silos and First Movers In the Sharing Economy Debates.” This interesting paper focuses on the classification of workers in the “sharing” or “gig” economy as employees or independent contractors, arguing that “[t]wo interacting forces create the most serious risk for inadequate policy formulation: (1) silos among legal experts, and (2) first-mover effects.” (Page 1 of the draft.) The silo argument is that lawyers operate in subject areas that are isolated from each other, such that tax experts, for example, fail to perceive the effects of tax-related worker-classification rule changes on non-tax (such as employment) law, and vice versa. The first-mover argument is that the first actors on the worker-classification issue can wield outsized influence, shaping the debate in legal contexts other than the one directly affected.

The paper and presentation provide interesting insights into how giants of the service-worker sharing economy—not just Uber and Lyft, but also TaskRabbit—influence the development of the law on worker status. And subject-matter silos are a common complaint among legal academics. That issue has arisen in administrative law, for example, where there may be different rules developed in the context of different agencies. Courts and policymakers may struggle with tax exceptionalism (in the parlance of Kristin Hickman). But I wonder both if the legal silos in the gig economy are as strong as the paper suggests, and whether the effects the paper observes are first-mover effects or something else. Continue reading “IU Tax Policy Colloquium: Ring, “Silos and First Movers In the Sharing Economy Debates””

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””

Undue Burdens and the Retroactivity Issue in Wayfair

By Adam Thimmesch

The major question presented in South Dakota v. Wayfair is whether the Supreme Court should overturn its long-standing physical presence limitation on state taxing power. (I believe that it should, as do most people who have studied the issue.) One of the secondary issues presented in Wayfair is whether the Court could apply such a repeal on a prospective basis only or whether a repeal would have to apply retroactively. Daniel Hemel had a great post introducing this issue last month, but I think that it is worth adding another dimension to the analysis.

The retroactivity issue presents itself as obvious in some respects—why couldn’t the Court issue a prospective only decision? And yet, this issue has troubled the Court, and it appeared as a consideration in Quill itself. The retroactivity issue is also being addressed in the briefs in the case (South Dakota’s merits brief was filed on Monday), and the Court is sure to bring up the issue in oral arguments in April. It seems possible that the Court would have enough votes to overturn Quill on its merits, but that no clear majority would appear regarding the retroactivity of its holding. Worst case, disagreement about that issue could cause some Justices to get cold feet on the primary issue. For these reasons, it is worth exploring retroactivity from a couple of different angles.

Continue reading “Undue Burdens and the Retroactivity Issue in Wayfair”

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!”

IU Tax Policy Colloquium: Glogower, “Taxing Inequality”

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Left to right: Damage Gamage, Ari Glogower, Leandra Lederman, Tim Riffle

By: Leandra Lederman

On February 15, the Indiana University Maurer School of Law welcomed Prof. Ari Glogower from Ohio State University Moritz College of Law as the third speaker of the year in our Tax Policy Colloquium. Ari presented his paper titled “Taxing Inequality,” which argues in favor of a federal wealth tax and proposes a mechanism for integrating the base of such a tax with the base of the federal income tax. Ari’s paper sparked a really interesting discussion both in and outside the workshop on a wide range of issues, from distributive justice to the mechanics and likely impacts of his proposal.

The paper focused first on why we should have a federal tax on wealth. The draft points to rising economic inequality, and it grounds the need for a wealth tax in the theory of “relative economic power.” That theory, borrowed from political science, focuses on spending power—as opposed to actual spending—as a source of economic power. The basic idea is that the mere ownership pf wealth creates economic power without spending it. Moreover, “excessively unequal distributions of economic resources and market power can result in unequal divisions of political and social power as well.” (p.19) One of Ari’s paper’s contributions is to apply this economic-power theory as a justification for a progressive tax system.

The draft then describes the problem that tax-system designers have in imposing both a wealth tax and an income tax. Because the two types of taxes are imposed on different bases, if the taxes are not coordinated, taxpayers with very different abilities to pay based on their income or wealth may be taxed identically. The paper includes some nice examples of taxpayers with the same income but vastly different stocks of wealth and vice versa. It shows, for example, that a taxpayer with $200,000 of current income and no wealth (or negative wealth in the form of student-loan debt) has lower ability to pay than a taxpayer with $200,000 of current income and $35 million in wealth. (Ari’s talk included a great slide featuring an image of Scrooge McDuck swimming in money as the wealthy taxpayer, but for whatever reason, he resisted our suggestion to rename the paper “Taxing Scrooge McDuck”!) Continue reading “IU Tax Policy Colloquium: Glogower, “Taxing Inequality””