Legal Theory Blog

Jensen on Capital Gains for Kept Property

Ronald H. Jensen (Pace University School of Law) has posted Can You Have Your Cake and Eat it Too? Achieving Capital Gain Treatment While Keeping the Property (Pittsburgh Tax Review, Vol. 5, 2008) on SSRN.  Here is the abstract:

Although the Internal Revenue Code clearly requires a "sale or exchange" for capital gain treatment, a surprisingly large body of case law and indeed IRS administrative rulings routinely ignore this requirement in the case of lawsuit recoveries for damage or injury to the taxpayer's property. This article concludes that the failure to apply the "sale or exchange" requirement is inconsistent with the statutory scheme and the prevailing capital gain jurisprudence, and that it constitutes bad policy.

Alesina, Ichino, & Karabarbounis on Gender Based Taxation

Alberto F. Alesina , Andrea Ichino and Loukas Karabarbounis (Harvard University - Department of Economics , European University Institute - Economics Department (ECO) and Harvard University - Department of Economics) have posted Gender Based Taxation and the Division Of Family Chores on SSRN.  Here is the abstract:

Gender Based Taxation (GBT) satisfies Ramsey's optimal criterion by taxing less the more elastic labor supply of women. This holds when different elasticities between men and women are taken as exogenous and primitive. We study GBT in a model in which, instead, elasticity differences emerge endogenously from the bargained allocation of family duties. We explore two polar cases, which summarize the channels through which GBT affects an economy encompassing a wider set of possible reasons for gender differences. In the first case, the allocation of family chores is uneven between spouses because men have a superior bargaining power. In the second, instead, women take up more chores because they have a comparative advantage in household activities. We show how GBT emerges as an optimal policy tool as result of the interaction between incentives within the family and the Ramsey criterion, which is internalized by the government but not by household members.

Kaplow on Taxing Leisure Compliments

Louis Kaplow (Harvard University - Harvard Law School) has posted has posted Taxing Leisure Complements on SSRN.  Here is the abstract:

Ever since Corlett and Hague (1953), it has been understood that it tends to be optimal on second-best grounds to (relatively) tax complements to leisure and subsidize substitutes because doing so helps to offset the distorting effect of taxation on labor supply. Yet in the context of simultaneous optimization of a nonlinear income tax and commodity taxes, Atkinson and Stiglitz (1976) claim to have demonstrated the opposite, that goods complementary with leisure should "face lower tax rates, whereas substitutes face higher tax rates." Derivations in leading texts on optimal taxation seem to yield opposing conclusions regarding the sign of optimal deviation of commodity taxes from uniformity. It is demonstrated that the optimality of relatively taxing leisure complements is indeed correct, and conflicting results are explained.

Camp on Palin's Tax Returns

Bryan Camp (Texas Tech University - School of Law) has posted A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007 on SSRN.  Here is the abstract:

Governor Palin's 2006 and 2007 tax returns create several teaching opportunities for basic tax classes. This paper analyzes five substantive issues created by the returns and by a legal opinion letter written by Roger Olsen on some of the issues. 

The five issues are: (1) the proper treatment of $17,000 paid to Palin by the state of Alaska as her travel allowance; (2) the proper treatment of $43,000 paid to Palin as a travel allowance for her husband and children; (3) the proper treatment of a $9,000 loss claimed for her husband's racing activity; (4) whether the Palins are subject to the penalties for negligence; and (5) whether Mr. Olsen's letter meets the standards for tax practice in Circular 230.

Turner & Harrison on the Dynasty Trust

William Turnier and Jeffrey Lynch Harrison (University of North Carolina School of Law and University of Florida - Fredric G. Levin College of Law) have posted A Malthusian Analysis of the So-Called Dynasty Trust on SSRN.  Here is the abstrat:

Select financial institutions and members of the Bar have seized upon the presence of the limited exemption from the generation skipping transfer tax provided under the Internal Revenue Code to promote so-called dynasty trusts as a means whereby individuals can build dynastic wealth for a family forever free from transfer taxes. To realize such benefits, the trust must be governed by state law that does not impose the Rule Against Perpetuities. The promise of dynastic wealth is unlikely to be realized due to several factors. Administrative and tax costs are likely to reduce the yield on such trusts to a level where inflation, rising expectations and an ever growing band of beneficiaries are typically assured to outpace the ability of the trust to deliver the benefits anticipated by trust settlors.

Rosenzweig on a Derivatives Trading Tax

Adam H. Rosenzweig (Washington University, St. Louis - School of Law) has posted Imperfect Financial Markets and the Hidden Costs of a Modern Income Tax on SSRN. Here is the abstract:

The news has been filled with stories of meltdowns in the financial world, with the government, independent agencies, and politicians all devoting significant time and energy to coping with the consequences. As investment banks, hedge funds, and mortgage lenders continue to suffer massive losses, the government and its agents are left to try to pick up the pieces. Among other options being discussed, the government has proposed buying up illiquid assets of such investors, in effect betting on the price of illiquid mortgage securities. But what if, in addition to these more transparent problems, additional hidden costs from the financial crisis were being borne by the government in some other way? Even worse, what if the government had implicitly underwritten some of them in the first place? Building on insights from recent finance literature, this article contends that the government could in fact bear such hidden costs, through the interaction of a unique and underappreciated aspect of publicly traded financial derivatives - the ability to "decouple" the economic return of a risky asset from direct ownership of the underlying asset itself - and an income tax on risky investments. Under relatively conservative assumptions, such an analytical approach can produce a surprising result: the imposition of a facially neutral income tax can actually serve to subsidize speculators in financial derivatives, both in the model and as extrapolated to the real world. More specifically, an income tax in a world with imperfect financial markets can result in incentives to speculators to impose excessive amounts of liquidity risk on the markets, and the economy as a whole, with the government ultimately bearing the cost.

These conclusions demonstrate the urgent need for a more comprehensive approach to financial derivative markets than has traditionally been undertaken, expanding the analysis beyond particular transactions to incorporate markets, traders, speculators, and investors more broadly. This article does so by proposing the adoption of a derivatives trading tax, not as a supplement to or replacement for, but rather as an integral part of, the income tax regime. Such a tax would not only offset the costs of imperfect financial markets borne by the government through the income tax, but could also ameliorate the suboptimal excess risk in the financial markets in the first place. Addressing such problems in this manner falls distinctly to the legal community, precisely because crafting the institutions and mechanisms necessary to equitably and efficiently allocate the costs and benefits of society is itself an inherently legal undertaking. Doing so may prove challenging, but it is a challenge to which the legal academy must rise for a comprehensive solution to be achieved.

Infanti on Taxing Civil Rights Gains

Anthony C. Infanti (University of Pittsburgh - School of Law) has posted Taxing Civil Rights Gains on SSRN.  Here is the abstract:

In this article, I take a novel approach to the question of what constitutes a "tax." I argue that the unique burdens placed on same-sex couples by the federal and state "defense of marriage" acts (the DOMAs) constitute a tax on gay and lesbian marriages.

Classifying the DOMAs as a "tax" has important substantive and rhetorical consequences. As a tax, the DOMAs are subject to the same constitutional restrictions as other taxes. This opens them to challenge under the federal constitution's direct tax clauses and the uniformity clauses present in many constitutions. Where such constitutional challenges are unavailable or unavailing, classifying the DOMAs as a tax provides grounds for arguing that this tax on lesbian and gay families should be taken into account when assessing the justness of the distribution of the overall tax burden. On a rhetorical level, labeling the DOMAs a tax on lesbian and gay families effectively counters the notion - implicit in their current moniker - that the DOMAs are a necessary "defense" of marriage against an assault by same-sex couples. Instead, calling the DOMAs a tax may prove to be an effective means for shifting the rhetorical debate over same-sex marriage by making it clear that the DOMAs do nothing more than punish lesbian and gay families because they are different.

Graetz on International Tax & Interest Expenses

Michael J. Graetz (Yale Law School) has posted A Multilateral Solution for the Income Tax Treatment of Interest Expenses on SSRN.  Here is the abstract:

Recent developments - including greater taxpayer sophistication in structuring and locating international financing arrangements, increased government concerns with the role of debt in sophisticated tax avoidance techniques, and disruption by decisions of the European Court of Justice of member states' regimes limiting interest deductions - have stimulated new laws and policy controversies concerning the international tax treatment of interest expenses. National rules are in flux regarding the financing of both inbound and outbound transactions.

Heretofore, the question of the proper treatment of interest expense has generally been looked at from the perspective of either inbound or outbound investment. As a result, the issues of residence countries' limitations on interest deductions on borrowing to finance low-taxed, exempt or deferred foreign source income, on the one hand, and of source countries' restrictions on interest deductions intended to limit companies' ability to strip income from a higher-tax to a lower-tax country, on the other, have generally been treated as separate issues. A fundamental contribution of this essay is to demonstrate their linkage and to call for a multilateral solution that would address both of these problems.

The complexity, the incoherence, and the futility of countries acting independently to limit interest deductions are now clear. Worldwide allocation of interest expense by both source and resident countries would eliminate a host of problems now bedeviling nations throughout the world - problems that have produced varying, complex, and inconsistent responses among different countries, responses that frequently may result in zero or double taxation. Given the flexibility of multinational corporations to choose where to locate their borrowing and the difficulties nations have in maintaining their domestic income tax bases in the face of such flexibility, achieving a multilateral agreement for the treatment of interest expense based on a worldwide allocation should become a priority project for both source and residence countries.

Hasen on Legal Transitions

David Hasen (University of Michigan at Ann Arbor - Law School) has posted Legal Transitions - Reliance Redux on SSRN.  Here is the abstract:

The recent literature on legal transitions is noted for its welfarist approach to the analysis of legal change. This approach tends to efface, and purports to debunk, a number of distinctions that are salient to conventional understandings of legal transitions. According to a welfarist analysis, these distinctions have no significant role to play in the analysis of legal change.

This article examines the theoretical apparatus on which these criticisms are based, with a principal focus on taxation. The examination demonstrates that the apparatus suffers from significant conceptual shortcomings. They include the unwarranted assimilation of legal to factual change, the naturalization of conventional arrangements, and the unfounded disregard of the distinction between making law and finding it. The result is an account of legal transitions that is unable either to explain actual transitions or to provide a novel normative theory of how legal change should take place. In the end, the older view of legal transitions is more capable than the welfarist approach of providing an adequate normative and positive framework for understanding legal transitions.

And from the conclusion:

In one sense, these criticisms can be traced back to a fundamental tenet of the new transitions literature, articulated first by Graetz,165 developed by Kaplow,166 and given perhaps its most comprehensive explication by Shaviro.167 This is the idea that new rules have a retroactive effect when they have an impact on the future consequences of decisions made prior to the adoption of the rule. The idea that such transitions “reach back into the past,” in Shaviro’s formulation,168 implies that one cannot meaningfully distinguish between legal transitions that apply by their terms to completed conduct and those that apply to the present and future consequences of completed conduct – conduct that projects itself into, and assumes the risks of, future developments. It is on the basis of this view that the transitions literature downplays, if it does not dismiss, the distinction between nominal retroactivity and nominal prospectivity that has retroactive effect. The considerations developed in this article, however, explain why it is sensible to draw a distinction in kind between forward-looking reforms and nominally retroactive ones, and why one might want to reserve the term retroactive for the latter as well as, perhaps, for future consequences of past actions where the distinction between past and future is irrelevant. Future consequences always depend upon future conditions, whereas past consequences and conduct depend upon nothing; they are complete. It is often appropriate to impute to investors an assumption of the risk that the future will differ from the past, but not that the past does not turn out to be what it was.

Compelling.  Highly recommended.

Dagan on Taxing the Non-Market Economy

Tsilly Dagan (Bar-Ilan University - Faculty of Law) has posted Taxing the Non-Market Economy on SSRN.  Here is the abstract:

This Article examines the interaction of tax policy and non-market exchanges. It discerns non-market attributes and interactions as a separate paradigm which coherently explains some significant questions of tax policy.

Drawing on the rich body of literature on commodification, the Article offers an innovative theoretical framework for analyzing the tax treatment of the non-market realm. The encounter between tax policy and the commodification scholarships is mutually enriching:

Looking at the commodifying implications of tax law helps explain - and set the boundaries of - some puzzling distinctions in our tax system (e.g. barters v. mutual gifts; work v. leisure; business expenses v. personal consumption; untaxed imputed income of homemakers; business v. non-profit organization). It highlights tax's ability to play a significant role in supporting (or undermining) the non-market. Appreciating this dimension of tax law implies that policymakers should weigh commodification concerns when making choices about what and how to tax.

Adding taxation to the legal institutions analyzed by commodification offers many subtleties for determining what precisely commodifies resources, transactions, and relationships and complements this literature with a set of refined tools for creatively targeting specific commodification concerns without carrying the costs of non-commodification.