New Paper on Tax Enforcement and Corporate Malfeasance

By: Leandra Lederman

I just finished drafting a paper that got me reading a lot about corporate fraud. I find fraud fascinating, so this was a bit of a treat! The new paper is Information Matters in Tax Enforcement, and it’s co-authored with my former student Joe Dugan (JD ’15), who is an attorney at DOJ (but did not write in his official capacity). We recently posted the article on SSRN (here), and will soon be looking for a home for it.

This article was prompted by Professor Wei Cui’s publication of Taxation Without Information: The Institutional Foundations of Modern Tax Collection, 20 U. Pa. J. Bus. L. 93 (2018). Cui sets forth the contrarian thesis that “modern governments can practice ‘taxation without information.’” His argument rests on two premises: (1) “giving governments effective access to taxpayer information through third parties does not explain the success of modern tax administration”; and (2) modern tax administration succeeds because business firms are pro-social, fostering compliance. Professor Daniel Hemel favorably reviewed Cui’s article on TaxProf blog.

Cui particularly takes issue with Henrik J. Kleven et al., Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries, 83 Economica 219 (2016), and Dina Pomeranz, No Taxation Without Information: Deterrence and Self-Enforcement in the Value Added Tax, 105 Am. Econ. Rev. 2539 (2015), both of which show the importance of third-party information reporting to tax enforcement. Cui’s article also criticizes Leandra Lederman, Reducing Information Gaps to Reduce the Tax Gap: When Is Information Reporting Warranted?, 78 Fordham L. Rev. 1733 (2010), which argued that information reporting is useful but not a panacea, and set forth six factors to evaluate the likely effectiveness of proposed information-reporting requirements.

Information Matters in Tax Enforcement takes on both of Cui’s arguments, as well as his subsidiary claim that the value-added tax (VAT) does not involve third-party reporting or reporting of individual transactions. Joe and I marshal a lot of evidence to show (1) third-party information reporting is generally very effective, and (2) firms are not inherently pro-social. Rather, the literature supports Kleven et al.’s argument that numerosity increases compliance. That is, where more people would have to collude, cheating is less likely due to the increased risk of defection. The fact that large firms generally are more tax compliant than small ones—a point Cui concedes—is consistent with that. Large firms are also subject to more regulation and oversight, which produce reliable information flows from the firm to the government. Joe and I also show that VATs do involve third-party reporting, with the modern trend being digital real-time reporting. Continue reading “New Paper on Tax Enforcement and Corporate Malfeasance”

Michigan and the Parsonage Allowance

 

I’ve been following Gaylor v. Mnuchin, the parsonage allowance case, for years now. A couple months ago, I got to hear oral arguments the second time it went up to the Seventh Circuit. And I’ve been waiting eagerly since for the court to issue its decision.

As of 11:18 pm Central time on January 30, the court had not yet issued its opinion. But, in spite of the case being fully briefed and argued, one update to the case recently occurred: the state of Michigan changed its mind.   Continue reading “Michigan and the Parsonage Allowance”

Elizabeth Warren and the Wealth Tax

By United States Senate, Public Domain

By Sam Brunson

It’s not even an election year, but the last couple weeks have been exciting for tax policy fans. First was Rep. Alexandria Ocasio-Cortez inserting the idea of a 70% top marginal rate into the public conversation. Then today, Sen. Elizabeth Warren proposed a wealth tax on taxpayers with household wealth in excess of $50 million. While she hasn’t released details, and the news reports aren’t completely clear, I’m assuming that households would pay 2% of their net worth in excess of $50 million, and an additional 1% on their wealth in excess of $1 billion.[fn1]

Can the government do that? Maybe, but probably not with a traditional wealth tax.  Continue reading “Elizabeth Warren and the Wealth Tax”

The Fyre Festival: Intro to Ja Rule’s Tax Troubles

By Sam Brunson

Photo by Eduardo Santos. CC BY 2.0

Like much of America, I watched a Fyre Festival documentary last week. I chose Hulu’s Fyre Fraud over Netflix’s Fyre: The Greatest Party That Never Happened because I only had time for one, and Fire Fraud had an interview with Billy McFarland. (I’ve since heard great things about Netflix’s documentary, too, so I’ll probably watch it eventually.)

About nineteen and a half minutes into the documentary, we’re introduced to Ja Rule; we see him in an interview (with Wendy, apparently), who says to him, “So you spent two years in prison.”

He responds, “Yeah, I went in on my state charge for the gun charge, and they ran it concurrent with my tax stuff.”

Now, Ja Rule’s tax troubles are probably the least interesting part of the documentary (and are over, iirc, as soon as he laughs after saying “tax stuff”). But I always find celebrity tax evasion interesting, so I thought I’d run it down a little. Continue reading “The Fyre Festival: Intro to Ja Rule’s Tax Troubles”

IU Tax Policy Colloquium: Hayashi, “Countercyclical Tax Bases”

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Prof. Andrew Hayashi

By: Leandra Lederman

On April 5, Indiana University Maurer School of Law’s Tax Policy Colloquium welcomed Andrew Hayashi from the University of Virginia School of Law. Andrew presented his fascinating new paper, “Countercyclical Tax Bases.” (The paper isn’t publicly available yet, but Andrew offered to share it by email with interested readers.)

The paper argues that the choice of tax base should take into account what tax base is most helpful to the economy in recessions. It points out that recessions are not rare; between 1980 and 2010, there were 5 recessions, covering 16% of that period. The paper does two main things. First, it provides interesting stylized examples showing how, following an economic shock that reduces income or housing value, three types of tax bases (income, sales, and property) each interact with household credit constraints and adjustment costs (committed consumption of housing) to either stabilize or aggravate the negative economic shock. These examples illustrate quantitatively how different tax bases can affect taxpayer behavior in a recession, and thus the local economy.

Second, the paper contains an original empirical study of county tax bases for 2007-2014, to see the effect of tax bases on the recessions of 2001 and the Great Recession of 2008-2009. Andrew combined data from the Government Finance Database, Zillow, the FBI’s Uniform Crime Reports, and the IRS’s Statistics of Income, among other places. Although the results for the two recessions were not identical, Andrew generally found in his OLS regressions that counties that relied more on property taxes had smaller increases in unemployment during the two recessions and may have recovered from the recession more quickly. Sales taxes generally had countercyclical effects, as well, particularly in stabilizing government revenues during the Great Recession. In general, counties that were most reliant on income taxes suffered the most in the two recessions (though the results for income taxes generally were not statistically significant). Continue reading “IU Tax Policy Colloquium: Hayashi, “Countercyclical Tax Bases””

The IU Maurer Law School’s 2019 Tax Policy Colloquium

By Leandra Ledermancolloquium2019poster

Indiana University Maurer School of Law’s 2019 Tax Policy Colloquium will kick off on Thursday, January 17. My colleague David Gamage is hosting the Colloquium this year, and I’m really excited to hear from the terrific line-up of speakers! Andrew Hayashi from Viriginia Law School will kick off the semester with his work in progress, Countercyclical Tax Bases. 

As I explained last year, The Tax Policy Colloquium is a course for students that features a series of speakers. The structure involves a background session with the students in alternate weeks, to help them get up to speed on the concepts presented in the paper draft. The workshops are open to the law school community and interested guests. They are usually attended not only by the students in the course but also by me, David Gamage, senior tax attorney/Maurer alumnus Tim Riffle, and a few other faculty, typically law school colleagues and/or tax or economics faculty from other schools on campus. We also invite other attorneys practicing in Bloomington and Indianapolis, tax Continue reading “The IU Maurer Law School’s 2019 Tax Policy Colloquium”

Section 199A’s Workplace Shift

By Diane Ring

As we mark the one year anniversary of tax reform, the aftermath continues to dominate tax policy analysis. New § 199A, which my co-author, Shu-Yi Oei, and I initially explored here and here and here, continues to attract significant attention, both in terms of the provision’s likely substantive effects, and the legislative, regulatory, and political issues it raises.

One of the most compelling, yet underanalyzed, questions is how § 199A could impact labor and dramatically reshape work, the workforce, and the workplace. In a new paper posted on SSRN on December 3, titled “Tax Law’s Workplace Shift,“ Shu-Yi and I tackle these issues in detail. In brief, the paper explores the factors that will determine whether § 199A is likely to cause a workplace shift from employee to independent contractor arrangements, and, if it does, how such a shift should be normatively evaluated. Ultimately, we show how our evaluation of these § 199A workplace effects must depend on the types of workers and work at issue. Continue reading “Section 199A’s Workplace Shift”

Tax Evasion and the Fraud Diamond

By: Leandra LedermanFraud Diamond image

There is an extensive set of literatures on tax compliance and evasion, often discussing the traditional economic model (the deterrence model) and/or behavioral theories such as social norms or tax morale. (For recent examples summarizing the theories, see this article by Kathleen Delaney Thomas, this one by Adam Thimmesch, or this one by yours truly.) There is also a separate accounting literature on fraud.

A key concept in this accounting literature is the “Fraud Triangle.” Yet despite the important role this theory plays within the accounting literature, the Fraud Triangle does not seem to have permeated the tax compliance literature, particularly the relevant legal literature.

For example, a search in “Secondary Materials” in Lexis for “‘fraud triangle’ w/50 tax!” turns up only one article, which is not a tax article but does cite a 2006 Tax Notes article authored by three CPAs. That article is James A. Tackett et al., “A Criminological Perspective of Tax Evasion” (paywalled). Yet, the Fraud Triangle should not be overlooked by scholars outside of accounting. It provides a powerful tool with which to conceptualize tax evasion. And, as discussed below, it helps provide a framework that both supports the deterrence model and allows other factors to coexist with deterrence.

The Fraud Triangle and the Fraud Diamond

The Fraud Triangle derives from three factors that criminologist Donald R. Cressey originally identified in a 1951 article in the Journal of Accountancy, “Why Do Trusted Persons Commit Fraud?: A Social-Psychological Study of Defalcators.” As discussed in his 1951 article and his 1953 book, “Other People’s Money: A Study in the Social Psychology of Embezzlement,” Cressey developed the factors that became the Fraud Triangle out of in-depth interviews with inmates who had been convicted of trust violations such as embezzlement. The three factors were labelled the “fraud triangle” by Steve Albrecht in the early 1990s. The elements of the Fraud Triangle, as discussed by Albrecht and others, are “perceived pressure” (usually financial), “perceived opportunity” to commit the fraud, and “rationalization” that the actions are justifiable or appropriate in the context of the situation. Albrecht and his coauthors of a 1979 KPMG study of convicted perpetrators of fraud “found that the decision to commit fraud is determined by the interaction of all three forces.” Continue reading “Tax Evasion and the Fraud Diamond”

The § 199A Regulations: Looking Toward Finalization

By: Leigh Osofsky
Professor of Law, UNC School of Law

As the holiday season approaches, tax practitioners and commentators are waiting for the arrival of a much-anticipated event: the finalization of the § 199A regulations. The Treasury Department has indicated that it is trying to finalize the regulations before the end of the year or shortly thereafter. Treasury has moved expeditiously with this monumental regulatory project for good reason: with the New Year comes the first tax filing season that will require application of § 199A (though those filing estimated returns may have already tried to apply the section). While the proposed regulations indicate that taxpayers may rely on the proposed regulations until the date that the final regulations are published in the Federal Register, it is nonetheless beneficial to have a bit more certainty regarding the operation of the provision as soon as possible going into filing season.

So, what can we expect of the final regulations? Much of what we saw in the proposed regulations – the basic regulatory approach – will likely stay the same. As Shuyi Oei and I catalogued in a recent article, Beyond Notice-and-Comment: The Making of the § 199A Regulations, Treasury put significant work into formulating the proposed regulations. Treasury engaged in extensive dialogue with interested constituencies prior to the release of the proposed regulations in addition to going through OIRA review. The proposed regulations offer a lengthy and detailed presentation of why Treasury chose particular approaches such as, for instance, a narrow reading of the critical “reputation or skill” clause from the statute. These types of fundamental decisions from the proposed regulations are thus unlikely to radically change.

This is not to say there will be no changes at all in the final regulations. Treasury has signaled it may make some changes to parts of the aggregation rules. And S Corp banks lobbied extensively both as part of the notice-and-comment period and outside of it to increase the de minimis threshold for the specified service trade or business (“SSTB”) characterization. If their lobbying effort is successful, the threshold will go up in the final regulations and allow more S Corp banks and similarly situated businesses to avoid classification in the undesirable SSTB category. This would be a real win for such banks, especially given that the statute itself does not explicitly provide for a de minimis exclusion from the SSTB category. Many other taxpayers pleaded for greater clarity, and, in particular, clearer exclusion from SSTB categorization, including in a slew of requests made as part of the notice-and-comment process. Shuyi Oei and I documented much of this dynamic in our recent work. However, Treasury is unlikely to grant the certainty requested by all, as the taxpayers making the requests are surely aware.

So, who will get a present in finalization and who will get a lump of coal? We will all find out soon enough. But my money is on few major changes and a lot of little ones around the edges.

Tax Panels at the 2019 AALS Annual Meeting

By: Shu-Yi Oei

The Association of American Law Schools will be holding the 2019 AALS Annual Meeting in New Orleans, LA from January 2-6, 2019. This year, I’m the chair of the AALS Tax Section. Your section officers (Heather Field, Erin Scharff, Kathleen Thomas, Larry Zelenak, Shu-Yi Oei)  are pleased to bring you four tax-related panels at the Annual Meeting. Two are Tax Section main programs, and two are programs we are cosponsoring with other sections. Details below.

We’re also organizing a dinner for Taxprofs (and friends) on Saturday, January 5. If you’re on the distribution list, you should have received an email about that and how to RSVP. If you’d like more details, please email me.

We hope to see many of you at the Annual Meeting!

Tax Section Main Program:  The 2017 Tax Changes, One Year Later (co-sponsored with Legislation & Law of the Political Process, and Trusts and Estates)
Saturday, January 5, 2019, 10:30 am – 12:15 pm

Moderator:
Shu-Yi Oei, Boston College Law School
Speakers:
Karen C. Burke, University of Florida Fredric G. Levin College of Law
Ajay K. Mehrotra, Northwestern University Pritzker School of Law
Leigh Osofsky, University of North Carolina School of Law
Daniel N. Shaviro, New York University School of Law
Program Description: Congress passed H.R. 1, a major piece of tax legislation, at the end of 2017. The new law made important changes to the individual, business, and cross-border business taxation. This panel will discuss the changes and the issues and questions that have arisen with respect to the new legislation over the past year. Panelists will address several topics, including international tax reform, choice-of-entity, the new qualified business income deduction (§ 199A), federal-state dynamics, budgetary and distributional impacts, the state of regulatory guidance, technical corrections and interpretive issues, and the possibility of follow-on legislation.

Business meeting at program conclusion.

New Voices in Tax Policy and Public Finance (cosponsored with Nonprofit and Philanthropy Law and Employee Benefits and Executive Compensation)
Saturday, January 5, 2019, 3:30-5:15 pm

Paper Presenters:
Ariel Jurow Kleiman (University of San Diego School of Law), Tax Limits and Public Control
Natalya Shnitser (Boston College Law School), Are Two Employers Better Than One? An Empirical Assessment of Multiple Employer Retirement Plans
Gladriel Shobe (BYU J. Reuben Clark Law School), Economic Segregation, Tax Reform, and the Local Tax Deduction
Commenters:
Heather Field (UC Hastings College of the Law)
David Gamage (Maurer School of Law, Indiana University at Bloomington)
Andy Grewal (University of Iowa College of Law)
Leo Martinez (UC Hastings College of the Law)
Peter Wiedenbeck (Washington University in St. Louis School of Law)
Program Description:
This program showcases works-in-progress by scholars with seven or fewer years of teaching experience doing research in tax policy, public finance, and related fields. These works-in-progress were selected from a call for papers. Commentators working in related areas will provide feedback on these papers. Abstracts of the papers to be presented will be available at the session. For the full papers, please email the panel moderator.

Continue reading “Tax Panels at the 2019 AALS Annual Meeting”