IU Tax Policy Colloquium: Glogower, “Taxing Inequality”

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””

IU Tax Policy Colloquium: Brooks, “The Case for Incrementalism in Tax Reform”

By: Leandra Lederman

Left to right: Jake Brooks, Leandra Lederman, Bill Popkin, David Gamage, Tim Riffle

On February 1, the Indiana University Maurer School of Law welcomed Prof. Jake Brooks from 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””

IU Tax Policy Colloquium: Brennan & McDonald, “Debt and Equity Taxation: A Combined Economic and Legal Perspective”

Left to right: Tim Riffle, Tom Brennan, Leandra Lederman, David Gamage, Karen Ward

By: Leandra Lederman


On January 18, the Indiana University Maurer School of Law welcomed Prof. Tom Brennan from Harvard Law School as the first speaker of the year in our Tax Policy Colloquium. Tom presented an early draft of a paper co-authored with Robert L. McDonald, Debt and Equity Taxation: A Combined Economic and Legal Perspective. We had a lively and interesting discussion about it in the workshop, as well as over dinner.

The paper, which I do not believe is publicly available yet, deals with the taxation of hybrid securities. It describes current law on how those securities are categorized as debt or equity, as well as the history of how the law developed. The paper criticizes the binary categorization of hybrid instruments as either debt or equity. It thus argues for a bifurcated approach.

The core of the current draft is a proposed new approach to debt and equity that considers the capitalization of a corporation as a whole and taxes the components in line with the underlying economics. The paper disaggregates the risk-free return, the risky return, and abnormal returns (rents). The paper proposes two possible systems of taxation: the “unlevered equity system” and the “levered equity system.” In the unlevered equity system, debt consists of risk-free obligations (like short-term Treasury bills) and equity is unlevered ownership of assets. In the levered equity system, the definition of debt is the same but equity is fully leveraged ownership of assets (fully financed by risk-free obligations). Under the unlevered approach, although particular investors may own a mix of debt and equity, the corporation itself effectively issues no net debt because it issues no risk-free obligations.

A key insight of the paper applies the Domar-Musgrave economic result that, under certain assumptions, risky returns on assets do not bear tax. Brennan and McDonald point out that the Domar-Musgrave insight also applies to corporations, although the securities are liabilities for them instead of assets. (Many years ago, I applied Domar-Musgave analysis in an article of mine on the tax favoritism for entrepreneurship, but I had not thought about its possible application to corporate income, which is a fascinating idea.) The implication of that insight, as Brennan & McDonald note, is that the risk-premium portion of return on investment effectively does not bear tax. As a result, under the unlevered system, all corporate income would bear corporate tax because the unlevered system does not have any net debt obligations. By contrast, adopting the levered system would make the corporate tax burden only rents, given a tax deduction for debt. The paper explains that this reaches the same result as the Mirrlees Review’s exemption for “normal returns” on corporate capital, as well as the allowance for corporate equity (ACE), if the ACE deduction is defined in a particular way. Continue reading “IU Tax Policy Colloquium: Brennan & McDonald, “Debt and Equity Taxation: A Combined Economic and Legal Perspective””

The 2018 Tax Policy Colloquium at the IU Maurer Law School

ColloquiumPosterBy Leandra Lederman

The 2018 Tax Policy Colloquium at the Indiana University Maurer School of Law will kick off next Thursday, January 18, with the presentation by Harvard Law School professor Tom Brennan of a fascinating and timely paper he is co-authoring with Robert L. McDonald, Debt and Equity Taxation: A Combined Economic and Legal Perspective. Tom is a terrific speaker, and I expect the workshop to be really interesting.

Last year, I did a closing post noting that some themes had emerged in the semester’s colloquium. This year, I plan to blog each workshop afterwards, with permission of the speakers. The full workshop schedule follows after the jump. If you will be in Bloomington and are interested in attending one or more workshops, just let me know and I can send you the paper once I receive it. (Most of the paper drafts will not be publicly available.)

The Tax Policy Colloquium is a course for students; I expect about 14 this semester, including a visiting scholar from another school on campus who has asked to audit. I conduct a background session with the students to help them get up to speed on the concepts presented in the paper draft. Typically, the actual workshops are attended not only by the students but also by my colleague David Gamage, senior tax attorney/Maurer alumnus Tim Riffle, and a few other faculty–law school colleagues and/or tax or economics faculty from other schools on campus. Sometimes other members of the community attend, such as a tax professor from another law school; another attorney practicing in Bloomington or Indianapolis; a student not enrolled in the class (Shuyi Oei‘s and Ben Leff‘s talks in 2016 were particularly popular with other students!); and/or a local judicial clerk. Eric Rasmusen from the IU Kelley School of Business and Margaret Ryznar from IU’s McKinney Law School in Indianapolis have each attended several of the talks.

Continue reading “The 2018 Tax Policy Colloquium at the IU Maurer Law School”

Looking Back at Maurer’s SALT-Filled 2017 Tax Policy Colloquium

By: Leandra Lederman

With classes starting again, I have been planning for the new academic year, which also entails looking back at the 2016-2017 year. I’m teaching Introduction to Income Tax this Fall, and will be teaching Corporate Tax and Tax Policy Colloquium this Spring.

I am fortunate to run our Tax Policy Colloquium. I blogged on TaxProf Blog about launching the Colloquium and reflected back on it there after its first year. From my perspective, it has consistently been a terrific experience. Spring 2017 was special, though, because many of the paper topics seemed to connect, although that was largely unplanned. Here is the list of presenters we hosted, and their paper titles:

Daniel Hemel, University of Chicago Law SchoolFederalism as a Safeguard of Progressivity

Rebecca Kysar, Brooklyn Law School, Automatic Legislation

Les Book, Villanova University School of Law & David Walker, Intuit (via Skype), Thinking About Taxpayer Rights and Social Psychology to Improve Administration of the EITC

Allison Christians, McGill University Faculty of LawHuman Rights At the Borders of Tax Sovereignty

Mildred Robinson, University of Virginia School of Law, Irreconcilable Differences?: State Income Tax Law in the Shadow of the Internal Revenue Code

Jason Oh, UCLA School of LawAre Progressive Tax Rates Progressive Policy?

David Gamage, Indiana University Maurer School of LawTax Cannibalization and State Government Tax Incentive Programs

Justin Ross, Indiana University School of Public and Environmental AffairsThe Impact of State Taxes on Pass-Through Businesses: Evidence from the 2012 Kansas Income Tax Reform

These papers got us to think both about state tax systems and about how the U.S. federal and state tax systems interact or differ. One recurring theme was how regressive U.S. state tax systems generally are (aggregating all the taxes within a state). That discussion started with Daniel Hemel’s paper; he cited 2015 ITEP data that came up repeatedly throughout the course.

The ITEP site lists Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana as the 10 states with the most regressive tax systems. I notice that several of those don’t have state income taxes. But many, including Indiana, do. As an example, here are the stats on Indiana’s tax system in 2015, coming in at 10th most regressive in the ITEP study.

In case you’re wondering, ITEP says that the 7 states with the least regressive tax systems in 2015 were (in alphabetical order) California, Delaware, the District of Columbia, Minnesota, Montana, Oregon, and Vermont. Least regressive doesn’t mean “progressive,” though: “In each of these states, at least some low- or middle-income groups pay more of their income in state and local taxes than wealthy families. In other words, every single state and local tax system is regressive and even these states that do better than others have much room for improvement.”

I’m now looking ahead to another terrific group of Colloquium speakers in Spring 2018. Paper topics are as yet undetermined, so I don’t know if themes will emerge, but I will plan to follow up with more on the Colloquium content in the future.