Legal Theory Blog

Burke on Corporate Taxation

Karen C. Burke (University of San Diego School of Law) has posted Is the Corporate Tax System 'Broken'? on SSRN. Here is the abstract:

The slated expiration of the Bush Administration's tax cuts in 2010 highlights the instability of the current 15% rate on dividends and capital gains. Meanwhile, pressure has mounted to reduce U.S. corporate tax rates to improve competitiveness in an increasingly global economy. Much of the 1986 Act reform of the corporate tax - base-broadening combined with lower rates - has unraveled, leaving the U.S. with a high statutory corporate tax rate and narrow corporate tax base. Despite renewed interest in base-broadening and loophole-closing, the goal of corporate tax reform remains elusive. Thus far, proponents of corporate tax reform have largely sidestepped the controversial issue of whether the 2003 tax cuts on dividends and capital gains should be made permanent.

This Article proceeds in three parts. The first part discusses the long-term decline in the role of the corporate tax in raising federal revenues and enhancing progressivity. Part two discusses how the Administration's 2003 proposal to eliminate double-level corporate taxation morphed into an unstable legislative compromise based on tax rate parity for dividends and capital gains. Part three considers two contrasting alternative goals reflected in current proposals for reform of business taxation: reduced corporate tax rates and enhanced expensing of new investment. The Article concludes that 1986-style base-broadening and reduced rates would improve competitiveness and limit tax sheltering opportunities, although a political consensus for such reform will be hard to forge and additional sources of revenue may be required to finance significant rate reductions.

Rifkin on Tax & Regional Cost of Living

Dave Rifkin (Georgetown University - Law Center) has posted Substantive Tax Equity and Adjusting the Income Tax for Regional Cost of Living Differences on SSRN.  Here is the abstract:

Substantial variations in the cost of living among regions in the United States are a major impediment to achieving a fair and equitable income tax system. Geographic cost of living differences arise because of disparities in the consumption power of income in different regions. Although the current Federal income tax system sometimes reflects and adjusts for changes in the cost of living over time (by indexing for inflation), it does not account for geographic cost of living variations - the Internal Revenue Code treats each dollar of income the same no matter where it is earned.

The underlying premise of this paper is that fairness is a goal of an income tax system. A system of taxation based upon fairness--i.e., ability to pay--must be apportioned based upon a taxpayer's power to consume.

The presence of liquidity and ease of transferability does not mean that money a uniform value. It is inequitable to apply a uniform system of taxation in different regions across the United States when money does not have uniform consumption power. Taxpayers whose consumption power differs have different abilities to pay (regardless of whether these taxpayers have the same nominal dollars of income). Money income, therefore, must be adjusted for regional cost of living differences to ensure that it represents the taxpayer's power to consume. Therefore, in order to achieve horizontal equity, taxpayers with similar power to consume should be taxed the same, regardless of where they live.

Lawksy on Tax & Uncertainty

Sarah Lawsky (George Washington) has posted Probably? Understanding Tax Law's Uncertainty on SSRN. Here is the abstract:

This Article analyzes the meaning of probability statements in tax law and in scholarship addressing civil tax penalties. Specifically, the Article draws on economics and the philosophy of mathematics to argue that because tax law is substantively uncertain, some probability statements in tax law are best understood as a reflection of the speaker's belief, rather than as a description of the number of times a given event will occur over the long run out of the number of times that it could occur. That is, these tax probability statements are best understood using a subjectivist interpretation of probability, rather than frequentist interpretation. Prior work in tax law scholarship in particular, and law and economics in general, has glossed over or misunderstood this crucial distinction.

Understanding that probability statements in tax law should be given a subjectivist interpretation changes both the theory and the practice of tax compliance. First, because tax probabilities represent beliefs, different parties--for example, Congress (the penalty-setter) on the one hand, and taxpayers on the other--may have different perceptions of the chances that a given transaction is permissible, and economic models should reflect these possibly disparate beliefs. Second, a subjectivist interpretation of tax probabilities provides additional support for stringent and much-criticized laws that regulate the substance of tax advisors' written opinions, as these strict rules may actually help tax advisors arrive at more accurate, less biased estimates of the chance that a tax position would be upheld by a court. And finally, a subjectivist interpretation suggests that lawmakers should be cautious of reducing tax law's uncertainty. If, as empirical work suggests, some taxpayers have an aversion to uncertainty, the uncertainty associated with whether certain questionable transactions are permitted (aside from any penalties imposed if transactions do turn out to be forbidden) may itself reduce the number of taxpayers who engage in these transactions.

Highly recommended--very interesting paper.

Mehrotra on Historical Materialism & Taxation of Corporate Reorganizations

Ajay K. Mehrotra (Indiana University School of Law-Bloomington) has posted Mergers, Taxes, and Historical Materialism (Indiana Law Journal, Vol. 83, p. 881, 2008) on SSRN. Here is the abstract:

In the last few years, corporate mergers and acquisitions witnessed explosive growth. Although more recent market conditions have halted the latest merger movement, scholars and commentators have used the earlier rise in merger activity to reevaluate the preferential tax treatment granted to those mergers and acquisitions that fall under the U.S. tax law's definition of a corporate "reorganization." Under the current Internal Revenue Code, neither shareholders nor corporations recognize gain or loss on the exchange of stock or securities in transactions that qualify as a "corporate reorganization." The significance of this tax rule raises a central question: why does this tax preference exist? Since its statutory inception in 1919, numerous scholars have debated the theoretical justifications for this tax law. Few, however, have sought to move beyond intellectual and conceptual origins to address the more pertinent question of institutional development: how and why has this tax benefit become a deeply entrenched part of American corporate tax law?

This Article mainly addresses this second question. It contends that historically constituted political and economic interests have gradually transformed this law from its beginnings as a limited statutory exception into a modern version of voluntary corporate welfare. This transformation can be explained less by resort to timeless economic logic or legal doctrine than by reference to the institutional dynamics and the unfolding of concrete economic, political, and social processes.

In chronicling the early phases of this gradual transformation, this Article has two interrelated objectives. First, it seeks to historicize the prehistory, the statutory origins, and the early liberalization of this corporate tax law. Second, this Article highlights the chronological and contingent development of the reorganization provisions. In examining the historical processes and conditions that led to the early expansion and entrenchment of this tax law, this Article illustrates the contested and provisional nature of the creation, expansion, and maintenance of this corporate tax benefit. This Article mainly investigates two pivotal periods - the 1920s when this rule was gradually liberalized, and the early 1930s when this tax law faced near elimination - to underscore how material context and historical sequence determined the possibilities of legal change.

This historical story about the reorganization tax preference, in the end, is not simply a tale about the evolution of an important and enduring corporate tax law. This narrative is also a case study of the broader legislative process. It shows how a typical legal regime is molded by the interactions of democratic institutions; how the lawmaking process is shaped by the negotiations among citizens, Congress, the courts, and executive agencies. Accordingly, this historical story illustrates the continuing dynamic that exists between law and society, revealing how the legal process of fortifying and routinizing laws can unwittingly create special interests - interests that often reshape and help maintain the laws that have created them.

McCouch on Estate Tax Repeal

Grayson M.P. McCouch (University of San Diego School of Law) has posted The Empty Promise of Estate Tax Repeal on SSRN. Here is the abstract:

The terms of the debate over the estate tax have been framed largely by abolitionists who have propounded an antitax message that portrays the estate tax as unambiguously harmful and threatening to ordinary families and small businesses. The attack on the estate tax is linked to a larger agenda of eliminating taxes on capital and capital income and dismantling the progressive elements of the federal tax system. The slogan of estate tax repeal, while effective in mobilizing antitax sentiment, makes no sense as a matter of tax policy because it downplays revenue costs, distributional effects, administrative concerns, and consequences for the rest of the tax system. The 2001 Act illustrates the gap between the abolitionists' simplistic antitax agenda and the complex reality of tradeoffs among competing tax and spending priorities. The estate tax cuts enacted in 2001 imply large revenue losses as well as a shift in tax burdens from the very rich to the middle class and from current taxpayers to future taxpayers. This appears to be a step in precisely the wrong direction, given growing inequalities of income and wealth and a looming fiscal gap.

Cain on Fair Taxation of Families

Patricia A. Cain (Santa Clara University - School of Law) has posted Taxing Families Fairly (Santa Clara Law Review, Vol. 48, No. 805, 2008) on SSRN. Here is the abstract:

This article focuses on the historical role of state marital property law in shaping the current federal tax rules regarding taxation of the family. Now that a number of states have granted status recognition to same-sex couples and granted them marital property rights, the tension between state property law and federal tax law has produced new problems. This article identifies those problems and proposes a solution that would restore uniformity and tax all families fairly.

Moin on Business Activities by Charities

Andrew Moin (Harvard Law School) has posted Red Herrings and Misguided Approaches: Taxation and Regulation of Business Activities by Charities in the United States and Canada (International Journal of Civil Society Law, Vol. 6, Iss. 2, April 2008) on SSRN. Here is the abstract:

Most countries place various limitations on the ability of charities to conduct business activities in areas unrelated to their charitable purpose. In this paper, I examine this narrow aspect of the legal framework for charities in the United States and Canada. First, I will briefly provide some background on charities' conduct of such activities. Next, I will broadly outline the current law in each country, highlighting key similarities and differences. Then, drawing on historical evidence, I will try to explain why the relevant law in each country developed as it did. Finally, I will evaluate each country's response, focusing not only on the results of each but also on whether the concerns that led to each were well-founded. Through doing so, I will attempt to draw conclusions as to whether there is a clear winner between the two statutory schemes, and if the experiences of each country can provide guidance for future attempts at reform.

Mirkay on Discrimination by Charities

Nicholas A Mirkay III (Widener University - School of Law) has posted Is it 'Charitable' to Discriminate?: The Necessary Transformation of Section 501(C)(3) into the Gold Standard for Charities (Wisconsin Law Review, Vol. 2007, No. 1) on SSRN. Here is the abstract:

With federal subsidies to charitable organizations exceeding $232 billion for fiscal years 2007 to 2011, the public benefit conferred by such organizations is an increasingly hot topic for Congress, the Internal Revenue Service and the entire nonprofit sector. Despite the national debate over nonprofit versus for-profit hospitals and excessive executive compensation, and the call for stricter governance and regulation, one recurring activity of charities appears to fly under the radar of reformers - discrimination. As illustrated in real-life occurrences contained in pages 3 and 4 of the article, seemingly widespread discrimination by charities exists not only with respect to employment, but more importantly in providing services or engaging in activities for which the organization was originally granted tax-exempt status (e.g., education). The primary bases for such discrimination are currently sexual orientation and marital status.

This article contends that these instances of discrimination are intrinsically incompatible with such organizations‘ "charitable" purpose and mission, and with society‘s notion of what constitutes a charity. This article contends that such organizations should not continue to enjoy the benefits of tax-exempt status if they engage in discriminatory practices or maintain discriminatory policies. To combat such discrimination, this article proposes the inclusion of an expansive nondiscrimination requirement within Section 501(c)(3). Such a requirement ensures that the stream of tax-deductible dollars (generated by the charitable contributions deduction) received by charities is not used to discriminate against any member or segment of society. The proposal transforms Section 501(c)(3) into the "gold standard" for all tax-exempt organizations, ensuring that their beneficiaries are as diverse and all encompassing as the taxpaying public from whom such organizations draw their support.

And by the same author, Losing Our Religion: Reevaluating the 501(C)(3) Exemption of Religious Organizations that Discriminate.

Prebble on Autopoiesis & Tax

John Prebble (Victoria University of Wellington - Faculty of Law) has posted Justice Hill and the Autopoiesis of Income Tax Law on SSRN. Here is the abstract:

The theory that law may best be understood as an autopoietic system has gained considerable ground since Luhmann advanced it in 1981.

Nevertheless, there have been few endeavours to apply the theory in any practical way or to employ it to analyze particular areas of law. In a recent paper, Geraldine Hikaka and the present author proposed the thesis that Luhmann's theories usefully illuminate the field of income tax law. The present paper illustrates this thesis by analyzing a leading case from each of the Privy Council and the High Court of Australia, namely Europa Oil (NZ) Ltd v Commissioner of Inland Revenue and Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd. The paper will argue that the autopoietic nature of income tax law presents challenges to the judicial process that, as these cases illustrate, lead to income tax law becoming detached from the business profits that are an important part of its subject matter.

The paper will then turn to Macquarie Finance Ltd v Federal Commissioner of Taxation, one of the last tax judgments of the late Justice Graham Hill. It will be argued that in Macquarie Finance Ltd Justice Hill demonstrated a rare, almost unique, ability among judges: to reconcile the formalistic, autopoietic nature of tax law with the business substance that was the subject matter of the case. The paper turns first, however, to the question of what is meant by the autopoietic theory of law.

Fleischer on Taxing Sovereign Wealth Funds

Vic Fleischer has a very interesting post entitled Taxing Sovereign Wealth Funds.  Here's a tiny taste:

The big worry is that these sovereign wealth funds are Trojan horses which will allow foreign governments to shape and influence American enterprise in a manner inconsistent with our economic and national security interests.  Even if funds are currently acting in a manner consistent with other, non-governmental institutional investors--and by most accounts they are--there's no guarantee that they will continue to do so in the future in circumstances where the financial interests of the fund and the political interests of the government that controls the fund diverge.  Giving foreign governments partial ownership of companies like Citigroup and Merrill Lynch gives those countries new leverage in foreign policy discussions; sudden withdrawal of foreign state-owned investment could harm the financial services sector of the U.S. economy.  Of course, one can also view these investments in a more positive light; China's investment in Blackstone might help it learn to modernize its own financial infrastructure, a development which would benefit the U.S. and China alike.

A very interesting post & also a model for the use of blogging for early development of scholarship.  Check it out!