Workforce and Workplace Trends: The Empirical Challenges and Policy Significance

By Diane Ring

On Thursday, my co-author (Shu-Yi Oei) and I had the opportunity to present on “Tax Related Challenges for Platform Workers” at the United States Government Accountability Office in downtown Boston. We enjoyed discussing our past and current research regarding taxation, platform workers, labor and emerging workforce trends with GAO researchers.

Our talk at GAO was particularly timely because we’re in the process of writing a book chapter for a new empirical volume, tentatively entitled “The Law and Policy of the Gig Economy: Qualitative Analysis,” which is forthcoming at Cambridge University Press (ed. Deepa Das Acevedo). This volume will address the promise of qualitative empirical approaches to studying the gig economy. Our contribution will build on our previous work in which we looked at the public online conversations among Uber and Lyft drivers regarding challenges they face in tax compliance.

Even without considering the impacts of the 2017 Tax Reform on both the gig economy and the broader workforce (which we have examined here, here and here), significant empirical questions remain regarding the tax and economic pressures faced by gig and contingent workers. Some, but not all, of those questions can be addressed by examining tax return and survey data. Add in tax reform to the mix (think the new section 199A deduction, the suspension of employee business deductions and the offshoring international provisions (section 250 and 956A)) and it’s clear we have a lot of work to do to better understand the interplay between tax and labor policies across many fields and how this will impact the future of the workplace. Our view is that it will take a combination of empirical approaches to get a well-textured picture of how tax impacts work.

The Kiddie Tax Needs a Better Fix Pt. 2

By Sam Brunson

Image by annca. Pixabay licence

As I explained in my previous post, the new kiddie tax is an absolute mess, with unintended and (I assume) unforeseen consequences that significantly harm, among others, poor college students and the children of service members killed in action. How is Congress going to fix this?

Poorly, I assume. And insufficiently.

I saw on Twitter yesterday that Rep. Cindy Axne is cosponsoring the Gold Star Family Tax Relief Act. Under the proposed legislation, the definition of “unearned income” will exclude survivor benefits received by the children of deceased service members. If this legislation were to pass, children of military members killed in action would no longer pay taxes at the top marginal rate on their survivor’s benefits. Continue reading “The Kiddie Tax Needs a Better Fix Pt. 2”

The New Kiddie Tax Needs a Better Fix Pt. 1

By Sam Brunson

Picture by Carissa Rogers. CC BY 2.0

One of the first articles I published as an academic was on the kiddie tax. It was a sleepy corner of the tax world; most of the academic literature on the kiddie tax came from the 1980s.[fn1] And, for its first three decades, the kiddie tax stayed almost exactly the same.[fn2] Then, in a little-noticed provision of the TCJA, Congress fundamentally changed the kiddie tax. In response, I addressed the kiddie tax a second time in a piece for Tax Notes entitled Meet the New “Kiddie Tax”: Simpler and Less Effective. [Paywall] It turns out that I underestimated the ways in which is was not only less effective, but actually dangerously counterproductive.

But first, a quick primer into what the kiddie tax was and what it has become. In 1986, Congress had become worried that wealthy taxpayers were shifting income-producing assets to their children so that they could lower their tax bills. The tax game would go something like this: wealthy dentist father gives (or, I suppose, sells for a nominal amount) his x-ray machines to his 7-year-old daughter. He then leases back the x-ray machines for, let’s say, $10,000 a year. In 1985, the top marginal tax rate was 50%. Assuming our dentist was in that tax bracket, he could deduct the $10,000 he paid to lease the x-ray machines. Meanwhile, assuming that his 7-year-old daughter didn’t have any additional income, she would have been in the 16% tax bracket. According to Rev. Proc. 84-79 (and ignoring any exemptions or deductions she might have), the daughter would pay taxes of $1,054 on the $10,000 of income. Meanwhile, Dad’s $10,000 deduction saved him $5,000 in taxes. By shifting passive income to his daughter, then, Dad saved almost $4,000.[fn3] (Note that it didn’t have to be dental equipment: it could be any income-producing property). Continue reading “The New Kiddie Tax Needs a Better Fix Pt. 1”

U.S. Business Community Calls for Ratification of Tax Treaties in U.S. — Again

By Diane Ring

I have been wondering for the past few years why the business community has not put more pressure on the Senate to resolve the tax treaty roadblock created by Senator Rand Paul (R-KY). In 2011, newly-elected Senator Paul announced objections to the ratification of tax treaties and protocols and sought to block Senate consideration of those tax agreements in the pipeline. Senator Paul contended that the exchange of information provisions in the treaties violated taxpayers’ 4th amendment rights to privacy in their banking and financial data and that U.S. disclosure of such data to treaty partners would violate the due process rights of taxpayers. He succeeded in blocking the agreements (none have been ratified since 2010) and the result is a backlog of negotiated but unratified U.S. tax treaties and protocols.

A single senator can delay vote on a treaty and keep debate open. Negotiation with Senator Paul has not proven fruitful because he fundamentally objects to the information exchange provisions. However, other senators do have procedural recourse to end debate on a treaty and bring it to a vote. Under a process known as “cloture” (see Senate Rule XXII), a vote of 60 senators can force the end of debate. But this procedural path also requires an additional 30 hours of debate and the Senate can conduct no other business during this time. Thus, the cloture option puts a significant price tag on efforts to end the ratification impasse.

In a 2016 article (When International Tax Agreements Fail at Home: A U.S. Example), I mapped the historical and Senate procedural factors leading to the standstill on tax treaty ratification in the U.S. and the business community’s failed efforts to lobby  ratification of tax treaties. For example, in 2013 several major U.S. business trade groups (including the Technology Industry Council, the National Association of Manufacturers, the National Foreign Trade Council, the U.S. Chamber of Commerce, and the United States Council for International Business) sent a letter to Senator Bob Corker stressing the importance of approving pending tax treaties and protocols. Senator Paul remained unmoved by business community pleas and apparently, the problem had not been considered serious enough to warrant commencement of cloture.

But it now appears that the business community has been reviving its public efforts to pressure the Senate to act: Continue reading “U.S. Business Community Calls for Ratification of Tax Treaties in U.S. — Again”

Do You Really Need More Information?

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

In a previous post, I explained with reference to the Cui 2017 paper on Third Party Information Reporting (TPIR) why I expect good quality TPIR, based on a primitive analysis of the human factor in corporate filings. When I started rereading Cui’s paper, I only read a few lines before a chapter heading from the CIA textbook “The Psychology of Intelligence Analysis” popped into my mind: Do you really need more information? That book contains a full chapter (starting on page 51) on how more information sometimes contributed nothing to the quality of the analysis, but was of immense help for the confidence of the analyst.

I will below make my argument for why the answer should be “yes” when it concerns the TPIR data mentioned by Cui in the paper, but it is a qualified yes. TPIR is a bit like cooking. Fantastic raw materials will not end up as gourmet meals on their own. You need a talented and skilled chef and a kitchen with the right tools, as well.

Having spent some time on capacity-building with less developed tax administrations than the Norwegian, I agree with Cui that establishing a TPIR machinery should not be the first priority in these countries. However, TPIR being the wrong starting point for some developing countries is not an argument for abstaining from it in Norway and other jurisdictions with better-resourced administrations. I will below state my case for why I find TPIR useful based on my observations working for the Norwegian Tax Administration (NTA) (which may of course differ from the opinions of the NTA itself). Continue reading “Do You Really Need More Information?”

The Human Factor in TPIR Filing

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

I happened to reread a paper by Wei Cui from 2017 on Third Party Information Reporting (TPIR) some weeks ago. Based on my own practical experience working for the Norwegian Tax Administration, I found it hard to agree with him on uselessness of TPIR. In this post, I will explain why I expect good quality in TPIR filing. I plan to write a later post on why TPIR is useful.

I will start with crediting Cui for outlining very well what I will call “the story of the corporate tax revenue collection machine.” He does a good job describing how the government has outsourced the bulk of the revenue collection to corporations. I would love to see papers adding empirical numbers to this description. My Norwegian perspective is a world of VAT, corporations withholding taxes on wages and delivering massive amounts of data used to prepopulate the personal tax filings. The way Cui describe the role of the corporations in the “tax revenue collection machine” is probably even more spot on for me than for a reader with a US perspective.

As I read Cui, he expect legal entities to cooperate sufficiently to ensure fairly good quality TPIR. He does some reasoning on why this is to be expected, but I did not find his arguments very convincing. This may be because for some years I have had a different line of reasoning ending with the same conclusion. What follows is based on material I used in a talk some ten years ago for my colleagues at the Large Taxpayer Office in Norway. The theme of that talk was why we found less evasion in our segment of taxpayers than what other tax auditors found when auditing smaller entities. I called the talk “The Human Factor in Tax Filing”. I believe the reasoning I used there also may explain high quality TPIR. Continue reading “The Human Factor in TPIR Filing”

Tax and Changing Labor Markets: The OECD Weighs In

By: Diane Ring

Across the globe, policy makers are wrestling with the possibility that the nature of work is changing and that those changes might be positive or negative. One of the most prominent changes identified is the rise of “non-standard” work, essentially work that is not part of a traditional employer-employee relationship. The rise of the gig economy, and perhaps its even greater growth in the public imagination, have fueled concerns about the prospect of disappearing employment and its replacement with less stable and less desirable non-employee work options.

The degree to which this shift is taking place is an empirical question which has been difficult to pin down. As my co-author Shu-Yi Oei and I have explored in our paper, Tax Law’s Workplace Shift (forthcoming in the Boston University Law Review), data on the changing nature of work comes from empirical studies, which suffer from limitations due to the questions asked, the terminology employed, and comparability of studies over time and across databases. But regardless of any precise conclusions on the rate at which work is changing, there are valid reasons to be concerned and inquire about the impact of tax law on any such shifts. The OECD has begun to weigh in on these questions, releasing a new working paper entitled Taxation and the Future of Work: How Tax Systems Influence Choice of Employment Form, by Anna Milanez and Barbara Bratta (March 21, 2019).

The OECD Project

In this paper, the OECD tackles the question of whether tax considerations may be driving any increases in non-standard work. Using three labor scenarios—traditional employee, self-employed worker, and incorporated worker (e.g., a personal services corporation)—the paper asks how the tax burdens change across the three labor scenarios in eight test countries (including the United States).

In particular, the paper measures the “tax payment wedge” in each labor scenario in each country.

Payment wedge = total employment costs minus worker take home pay                                                                                  total employment costs

where total employment costs equal take home pay, income tax, employee social security contributions, employer social contributions, and payroll taxes minus any cash transfers (i.e. cash payments from the government to the worker, such as those made with respect to dependent children).

What did the OECD find across these eight test countries? Continue reading “Tax and Changing Labor Markets: The OECD Weighs In”

Jussie Smollett and the Illinois Film Tax Credit

By Sam Brunson

By Ben P L. CC BY-SA 2.0

On Tuesday, Joe Magats, first assistant state’s attorney for Cook County, announced that he was dropping the charges against actor Jussie Smollett. Instead of a trial and punishment, Smollett agreed to forfeit his $10,000 bond and do community service.

Cook County prosecutors say this is a relatively normal type of alternative prosecution, one that prosecutors have recommended for over 5,700 offenders. It allows prosecutors to use their resources to prosecute violent offenders.

Not surprisingly, there’s some outrage about this alternative prosecution, notably from Chicago Mayor Rahm Emanuel and CPD Superintendent Eddie Johnson. But this is a tax blog, not a criminal justice blog, so questions about the justice (or not) of dropping Smollett’s prosecution are outside of our usual scope. Which is why I’m going to focus, instead, on Illinois Representative Michael McAuliffe and his terrible, horrible, no good, very bad bill. Continue reading “Jussie Smollett and the Illinois Film Tax Credit”

Lead us not into temptation

By Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

The Norwegian Tax Administration (NTA) has succeeded in leading most of the taxpayers away from the temptation of tax evasion over the last two decades. Not all, but most. It was not by carefully guiding them down a narrow path. The NTA constructed a wide avenue built on large quantities of third-party information pushed into prepopulated tax filings. Norway tweaked details in the rules for the most used deductions, linking them to easy observable facts and standard rates instead of using actual cost. Feedback from audits were used to evaluate possible changes in rules, eliminating or reducing the temptations facing the taxpayer in the filing process.

After all this work, we still had a problem with taxpayers being formally non-compliant by not logging into the digital portal and clicking the button for submitting their prepopulated tax filing. The easy fix was to change the law. A taxpayer receiving the digital and prepopulated tax report would be deemed to accept it as his filing if he stayed passive. Presto, even more compliant taxpayers.

But, at least for internal use, the NTA retained the old division of taxpayers into those who want to comply and those who want to evade. The faithful and the sinners. What people want is hard to observe, and it is hard to design measures to influence what people want. The NTA kept it despite its actions being focused very much on making it irrelevant whether the taxpayer wanted this or that. Spending all my time auditing MNEs, I found it really hard to figure out the wants of a corporation. Continue reading “Lead us not into temptation”

More on the College Admissions Scandal

By Sam Brunson

On Wednesday, I posted about how tax law played a central role in the college admissions scandal. As I’ve read through a little more of the affidavit, I decided to highlight two additional detail in this whole scandal, details that suggest that, for at least some of the participants, the tax consequences were very important.

Bruce Isackson and Facebook Stock

Bruce Isackson is the president of WP Investments, a real estate investment and development fund.[fn1] According to the affidavit, he used the fake athlete thing (soccer for the older daughter, rowing for the younger) to get two daughters into USC. He seems to have also paid for his younger daughter to get a better ACT score.

What’s interesting for purposes of this post is how he paid. Continue reading “More on the College Admissions Scandal”

Key Worldwide Foundation and College Admissions Scams

By Sam Brunson

When I first read about the massive college admissions scam, I read it for roughly the same schadenfreude as everybody else. It was an interesting—and frankly, kind of pathetic—story of wealth and entitlement.

And then I read the affidavit supporting the criminal indictment. And I learned that, as much as this is a story of wealth and entitlement, it’s more than that: this is a story that revolves around taxes. And specifically, the abuse of a tax-exempt organization.

There seem to have been two main schemes to get participants’ kids into schools they wouldn’t have otherwise qualified for. The first involved cheating on entrance exams. The second involved bribing athletic directors and others to designate their kids as athletic recruits (often in sports the kids didn’t play), and , each of which had its own fee structure. But each scheme had something in common. The recipient of the payments was Key Worldwide Foundation. Continue reading “Key Worldwide Foundation and College Admissions Scams”

IU Tax Policy Colloquium: Williamson, Filer Voter: An Experiment Testing Voter Registration at Tax Time

IMG_7332
Left to right: Pamela Foohey, Leandra Lederman, Vanessa Williamson, David Gamage, Tim Riffle

By: Leandra Lederman

On February 28, Indiana University Maurer School of Law’s Tax Policy Colloquium, hosted this year by my colleague David Gamage, welcomed Vanessa Williamson from the Brookings Institution. Vanessa presented a report that is due to be released at the end of March on a “Filer Voter” experiment she conducted at Volunteer Income Tax Assistance (VITA) sites in Cleveland, Ohio and Dallas, Texas.

For those who may not be familiar with it, VITA is an IRS-run program that offers free tax return preparation (generally federal and state) for taxpayers who made $54,000 in income or less (for 2018) and meet certain other requirements. An IRS web page provides training materials and certification tests for volunteers. The IRS works with local groups in that it provides VITA grants to partner organizations. For example, in Bloomington, the VITA program is run by United Way of Monroe County.

Vanessa’s Filer Voter experiment involved offering some taxpayers who come to VITA sites for tax-return preparation the opportunity to register to vote. The experiment was structured as follows: Each VITA session was divided in half by time, and within each session, the first half or second half was randomly assigned the treatment of offering voter registration, and the other half of the session was the control. The study included collection of demographic information and consent forms from taxpayers in both the treatment and control groups. Continue reading “IU Tax Policy Colloquium: Williamson, Filer Voter: An Experiment Testing Voter Registration at Tax Time”

A Mission From God: Blues Brothers and Tax

By Sam Brunson

On February 1, Amazon Prime Video started streaming Blues Brothers. Now, in spite of its being one of the great movies of the 20th century, and having one of the greatest soundtracks ever, I hadn’t seen it in years, and definitely not since I moved to Chicago. So I decided to watch it, both because I love the movie and because I wanted to see its view of Chicago now that I know this city.

I remembered that the plot revolved around Jake and Elwood trying to raise $5,000 for the orphanage they grew up in or the orphanage will be closed, but I’d forgotten that the $5,000 was to pay the orphanage’s property tax assessment:

I’d also never watched a movie with Amazon’s X-Ray feature before. And X-Ray announced that the motivation for their mission from God is a factual error, because Illinois doesn’t tax church property.

Is that true? Continue reading “A Mission From God: Blues Brothers and Tax”

The Trump Foundation and the Private Foundation Termination Tax

By Ellen P. Aprill

Michael Cohen’s accusations against President Trump in his statement before the House Committee on Oversight and Reform yesterday include arranging for a straw bidder to purchase a portrait of President Trump at an auction, using Trump Foundation funds to repay the fake bidder, and keeping the art for himself.  As part of the New York Attorney General’s  stipulation agreement with The Trump Foundation, the foundation must sell two other Trump portraits it currently owns. 

This stipulation agreement with the New York Attorney General has saved the Trump Foundation from a burdensome penalty tax in connection with the involuntary termination.  As had been widely reported at the end of last year, the New York Attorney General announced on December 18 that its investigation had found “a shocking pattern of illegality involving the Trump Foundation – including unlawful coordination with the Trump presidential campaign, repeated and willful self-dealing, and much more.”  Under the stipulation agreement, the Trump Foundation will dissolve and submit to the court a list of non-for-profit organizations to receive the Foundation’s remaining assets.  The Attorney General and the state court will need to approve the organizations that receive the Trump Foundation’s funds. Continue reading “The Trump Foundation and the Private Foundation Termination Tax”

TIGTA’s Report on the Growing Gig Economy

By: Joseph C. Dugan, Trial Attorney, Department of Justice, Civil Division

On February 14, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a Valentine’s Day treat: a comprehensive report following a TIGTA audit concerning self-employment tax compliance by taxpayers in the emerging “gig economy.”

As Forbes noted last year, over one-third of American workers participate in the gig economy, doing freelance or part-time work to supplement their regular incomes or stringing together a series of “gigs” to displace traditional employment.  Popular gig services include ride-sharing giants Uber and Lyft; arts-and-crafts hub Etsy; food delivery services GrubHub and Postmates; and domestic support networks Care.com and TaskRabbit.  Even Amazon.com, the second-largest retailer in the world and a traditional employer to many thousands of workers in Seattle and at Amazon distribution centers worldwide, has gotten in on the gig economy with its Amazon Flex service.  And for those interested in more professional work experience to pad their resumes, Fiverr connects businesses with freelance copywriters, marketers, and graphic designers.  The power of smartphones and social media, coupled with flat wage growth in recent years, makes the digital side hustle appealing and, for many households, necessary.

From a tax revenue perspective, the gig economy is great:  it is creating billions of dollars of additional wealth and helping to replenish government coffers that the so-called Tax Cuts and Jobs Act (TCJA) has left a little emptier than usual.  From a tax compliance perspective, however, the gig economy presents new challenges.  Gig payers generally treat their workers as independent contractors, which means that the payers do not withhold income tax and do not pay the employer portion of FICA.  Instead, the contractor is required to remit quarterly estimated income tax payments to the IRS and to pay the regressive self-employment tax, which works out to 15.3% on the first $128,400 in net earnings during TY2018, and 2.9% to 3.8% on additional net earnings.  That self-employment tax applies even for low-income freelancers (i.e., it cannot be canceled out by the standard deduction or nonrefundable credits). Continue reading “TIGTA’s Report on the Growing Gig Economy”