Tax Law Commons^™

Income Tax Discrimination And The Political And Economic Integration Of Europe, Michael J. Graetz, Alvin C. Warren Jr.

Faculty Scholarship

In recent years, the European Court of Justice (ECJ) has invalidated many income tax law provisions of European Union (EU) member states as violating European constitutional treaty guarantees of freedom of movement for goods, services, persons, and capital. These decisions have not, however, been matched by significant EU income tax legislation, because no EU political institution has the power to enact such legislation without unanimous consent from the member states. In this Article, we describe how the developing ECJ jurisprudence threatens the ability of member states to use tax incentives to stimulate their domestic economies and to resolve problems of …

Contextual Analysis Of Tax Ownership, Alex Raskolnikov

Faculty Scholarship

Ownership is one of the most fundamental concepts in tax law, yet it remains remarkably confused. The uncertainty inhibits tax planning, leads to inconsistent responses from the government, and produces unexpected outcomes in the courts. There has been no shortage of scholarly attention to the issue, but most of the commentary has been either exceedingly narrow or focused on far-reaching reforms. As a result, the law of tax ownership lacks conceptual foundation. This article attempts to remedy the deficiency by proposing a comprehensive approach to tax ownership and demonstrating that the doctrine may (and should) be significantly clarified without a …

Market Bubbles And Wasteful Avoidance: Tax And Regulatory Constraints On Short Sales, Michael R. Powers, David M. Schizer, Martin Shubik

Faculty Scholarship

In recent years, a speculative bubble in Internet stocks has burst and several "blue chip" firms have failed amidst high profile allegations of corporate misconduct. Why did high-tech start-ups with no earnings attain such lofty valuations? Why didn't sophisticated investors keep prices at saner levels? And why didn't more sophisticated investors look past accounting gimmicks much earlier to uncover problems at Enron and other firms? More generally, why did the mechanisms of market efficiency prove inadequate? While there obviously is no single answer to these complex questions, this Article focuses on one piece of the problem: U.S. tax and regulatory …

Frictions And Tax-Motivated Hedging: An Empirical Exploration Of Publicly-Traded Exchangeable Securities, William M. Gentry, David M. Schizer

Faculty Scholarship

As financial engineering becomes more sophisticated, taxing income from capital becomes increasingly difficult. We offer the first empirical study of a high profile strategy known as "taxfree hedging," which offers economic benefits of a sale without tnggering tax. We explore nontax costs that taxpayers face when hedging by issuing so-called "DECS," "PHONES," and other publicly-traded exchangeable securities. Focusing on 61 transactions between 1993 and 2001, we shed light on why taxpayers might prefer to hedge through private "over-the-counter" transactions: An offering of exchangeable securities is announced in advance and implemented all at once, triggering an almost 4 percent decline in …

Taxing International Portfolio Income, Michael J. Graetz, Itai Grinberg

Faculty Scholarship

Most analyses of the taxation of international income earned by U.S. corporations or individuals have addressed income from direct investments abroad. With the exception of routine bows to the "international tax compromise" and sporadic discussions of the practical difficulties residence countries face in collecting taxes on international portfolio income, the taxation of international portfolio income generally has been ignored in the tax literature.

Analysis and reassessment of U.S. tax policy regarding international portfolio income is long overdue. The amount of international portfolio investment and its role in the world economy has grown exponentially in recent years. In most years since …

100 Million Unnecessary Returns: A Fresh Start For The U.S. Tax System, Michael J. Graetz

Faculty Scholarship

We are now in a quiet interlude awaiting the next serious political debate over the nation's tax system. No fundamental tax policy concerns were at stake in the 2002 disputes over economic stimulus or the political huffing and puffing about postponing or accelerating the income tax rate cuts of the 2001 Act. Those arguments were concerned principally with positioning Democratic and Republican candidates for the 2002 congressional election, not tax policy.

But the coming decade, with its paint-by-numbers phase-ins and phaseouts of 2001 Act tax changes, the tax cuts waiting to spring into effect, and the sunset of the entire …

Erwin Griswold's Tax Law – And Ours, Michael J. Graetz

Faculty Scholarship

It is a pleasure for me to be here today to deliver the Erwin N. Griswold Lecture. And it is an honor to follow those who have graced this lectern before me. They include important mentors to me. Several are close friends. Today, we are in a quiet interlude awaiting the next serious political debate about restructuring the nation's tax system. No fundamental tax policy concerns are at stake in the current disputes over economic stimulus or in the political huffing and puffing about postponing or accelerating the income tax rate cuts of the 2001 Act. Those arguments are concerned …

Frictions As A Constraint On Tax Planning, David M. Schizer

Faculty Scholarship

The government often uses narrow tax reforms to target specific planning strategies. Sometimes the targeted transaction is stopped. But in other cases, taxpayers press on, tweaking the deal just enough to sidestep the reform. The difference often lies in transaction costs, financial accounting, and other 'frictions, " which are constraints on tax planning external to the tax law.

This Article contributes a methodology for determining whether frictions will block end runs, and illustrates the effect of frictions by comparing the constructive sale rule of section 1259 with the constructive ownership rule of section 1260. These reforms use the same statutory …

The David R. Tillinghast Lecture: Taxing International Income: Inadequate Principles, Outdated Concepts, And Unsatisfactory Policies, Michael J. Graetz

Faculty Scholarship

It is a pleasure to be here today to deliver the first David R. Tillinghast Lecture of the 21st century, a lecture honoring a man who has done much to shape and stimulate our thinking about the international tax world of the 20th.

Our nation's system for taxing international income today is largely a creature of the period 1918-1928, a time when the income tax was itself in childhood. From the inception of the income tax (1913 for individuals, 1909 for corporations) until 1918, foreign taxes were deducted like any other business expense. In 1918, the foreign tax credit (FTC) …

Sticks And Snakes: Derivatives And Curtailing Aggressive Tax Planning, David M. Schizer

Faculty Scholarship

The most important tax problem of recent months is the impact of aggressive tax planning on corporate tax revenue. The Secretary of the Treasury blames the "tax shelter industry," in which tax lawyers and investment bankers develop and market tax-motivated transactions. This Article analyzes aggressive tax planning, and recommends ways to impede it, in a context rife with opportunities for planning: the tax rules for complex financial instruments known as derivatives. While planning opportunities are prevalent elsewhere in the tax law as well, this Article focuses on derivatives because the problem is particularly acute – indeed, derivatives have been called …

Randolph W. Thrower Lecture: Your Tax Dollars At Work: Why U.S. Tax Law Needs To Be Changed, Michael J. Graetz

Faculty Scholarship

I focus here on prospects for tax reform. Things are quiet, politically, on the tax reform front. The Republicans in 1999 are talking about an across-theboard tax cut less extensive than Ronald Reagan's tax cut of 1981. On February 1, 1999, President Clinton, in his budget proposals, offered thirty-eight "targeted" tax reduction proposals and seventy-four tax increase proposals. It took the Treasury Department 197 closely typed, single-spaced pages to describe the proposals. We do not appear to be on the verge of major tax simplification.

Realization As Subsidy, David M. Schizer

Faculty Scholarship

Perhaps no concept in tax law is so well established, and yet so widely criticized, as realization, the rule that defers tax on appreciated property until it is sold. In this Article, Professor Schizer offers a new justification for realization: It is a subsidy for savings. The recent reduction in the capital gains tax rate suggests that Congress wants such a subsidy, the author observes. He then argues that realization has a significant advantage as a subsidy. It is credible, in that taxpayers expect it to strvive long enough for them to collect it This is important, Professor Schizer then …

The "Original Intent" Of U.S. International Taxation, Michael J. Graetz, Michael M. O'Hear

Faculty Scholarship

The Sixteenth Amendment took effect on February 25, 1913, permitting Congress to tax income "from whatever source derived," and on October 3rd of that year, Congress approved a tax on the net income of individuals and corporations. The United States regime for taxing international income took shape soon thereafter, during the decade 1919-1928. In the Revenue Act of 1918, the United States enacted, for the first time anywhere in the world, a credit against U.S. income for taxes paid by a U.S. citizen or resident to any foreign government on income earned outside the United States. The Revenue Act of …

International Aspects Of Fundamental Tax Reconstructing: Practice Or Principle, Michael J. Graetz

Faculty Scholarship

The globalization of economic activity, including the expansion of international trade, the amazing ability of international capital markets to transfer capital rapidly across borders, and the movement in Europe toward greater economic unification, have made it more difficult for nations independently to fashion tax laws that properly balance their own equity, economic efficiency and simplicity goals. This is what makes this conference to analyze the international aspects of recent proposals to replace the federal income tax with some form of consumption tax, with particular emphasis on the Nunn-Domenici "USA" tax and the Armey-Shelby flat tax ("flat tax"), so important. As …

An Open Letter To Congressman Gingrich, Bruce Ackerman, Akhil Amar, Jack Balkin, Susan Low Bloch, Philip Chase Bobbitt, Richard Fallon, Paul Kahn, Philip Kurland, Douglas Laycock, Sanford Levinson, Frank Michelman, Michael Perry, Robert Post, Jed Rubenfeld, David Strauss, Cass Sunstein, Harry Wellington

Faculty Scholarship

We urge you to reconsider your proposal to amend the House Rules to require a three-fifths vote for enactment of laws that increase income taxes. This proposal violates the explicit intentions of the Framers. It is inconsistent with the Constitution's language and structure. It departs sharply from traditional congressional practice. It may generate constitutional litigation that will encourage Supreme Court intervention in an area best left to responsible congressional decision.

Unless the proposal is withdrawn now, it will serve as an unfortunate precedent for the proliferation of supermajority rules on a host of different subjects in the future. Over time, …

Paint-By-Numbers Tax Lawmaking, Michael J. Graetz

Faculty Scholarship

Although their meaning and contours have long been controversial, the general criteria for evaluating changes in tax law enjoy both stability and consensus. At least since Adam Smith, there has been virtually universal agreement that the nation's tax law should be fair, economically efficient, and simple to comply with and to administer. Tax law changes should be designed to make the law more equitable, easier to comply with, more conducive to economic growth, and less likely to interfere with private economic decisionmaking.

Precisely what these criteria imply for policymaking is controversial, however. Fairness is often said to require that people …

Tax Policy At The Beginning Of The Clinton Administration, Michael J. Graetz

Faculty Scholarship

Ten years ago, in 1983, the Yale Journal on Regulation was started by students at the Yale Law School to foster scholarship and debate on issues of regulatory policy. Today the Journal staff consists of students from Yale University graduate and professional programs in law, management, forestry, and public health. One of the Journal's primary missions was to track the regulatory/deregulatory developments under the Reagan Administration and later the Bush Administration. Since our tenth anniversary coincided with the installment of a Democratic Administration under President Clinton, we have asked two professors at the Yale Law School to submit an essay …

Unlimited Liability And Law Firm Organization: Tax Factors And The Direction Of Causation, Ronald J. Gilson

Faculty Scholarship

In a recent issue of this Journal, Carr and Mathewson (1988) test a model of the impact of limited and unlimited liability regimes on the nature of firms by comparing the performance of law firms operated as partnerships and sole proprietorships (and therefore subject to unlimited liability) with that of law firms operated as corporations (and therefore subject to limited liability).

The Demand For Tax Return Preparation Services, Jeffrey A. Dubin, Michael J. Graetz, Michael A. Udell, Louis L. Wilde

Faculty Scholarship

We analyze taxpayer choices of return preparation services. We distinguish between two types of nonpaid preparers, six types of paid third parties, and self-preparation. Among other things, we find significant differences in the factors which explain the demand for paid third parties who are and are not able to represent clients before the IRS. Among these factors are increases in IRS audit rates and the frequency of IRS penalties.

Retirement Security And Tax Policies: A Reply, Michael J. Graetz

Faculty Scholarship

In an Article published in the April 1987 issue of the University of Pennsylvania Law Review, I urged that the three major components of this nation's retirement income system – Social Security, and income tax preferences for both employer-sponsored pension plans and individual retirement savings – be analyzed as a comprehensive national retirement income security program. I demonstrated that such an integrated view of this tripartite retirement security system reveals serious problems both with Social Security and with the generally applauded "tax expenditure" provisions for private pensions and individual savings. Viewing the three elements as a unified retirement security arrangement …

The Truth About Tax Reform, Michael J. Graetz

Faculty Scholarship

The Tax Reform Act of 1986 has been widely heralded as the most important tax legislation since the income tax was converted to a tax on the masses during the Second World War. Since his favorite proposal for a constitutional amendment – the one calling for a balanced budget – was not adopted, the 1986 Tax Reform Act clearly will be the major domestic achievement of Ronald Reagan's presidency. This law even produced the new Internal Revenue Code of 1986; no more Internal Revenue Code of 1954, as amended. It took until the very end of 1987 until we were …

Are We A Nation Of Tax Cheaters? New Econometric Evidence On Tax Compliance, Jeffrey A. Dubin, Michael J. Graetz, Louis L. Wilde

Faculty Scholarship

In 1982, then Commissioner of Internal Revenue Roscoe Egger reported to Congress that legal sector noncompliance with the Federal Income Tax statutes generated an "income tax gap" of $81 billion in 1981, up from $29 billion in 1973. He further projected a gap of $120 billion for 1985 (U.S. Congress, 1982). Perceptions of accelerating noncompliance inspired a crisis mentality within the Internal Revenue Service, Congress, and the tax bar.

The IRS responded in part by funding a major independent study of tax noncompliance via the National Academy of Sciences, and the American Bar Foundation initiated an investigation of its own …

Troubled Marriage Of Retirement Security And Tax Policies, Michael J. Graetz

Faculty Scholarship

This Article concentrates on equitable and distributional aspects of the retirement security problem, although the unified view taken here seems essential to an adequate assessment of the fairness or efficacy either of the three components taken together or of any one of the three. Moreover, because tax legislation serves as the dominant public mechanism for implementing national retirement policy, whether through funding Social Security via the payroll tax or providing tax incentives for both private pensions and individual savings, a unified view of retirement security policy highlights interrelationships, confluences, and potential conflicts between retirement security and tax policy concerns.

This …

Introduction To The Edwin S. Cohen Tax Symposium: An Overview Of Business Taxation, Michael J. Graetz

Faculty Scholarship

It is an honor and pleasure for me to be here today to launch this symposium on current tax reform topics in honor of Edwin S. Cohen on the occasion of his retirement from the University of Virginia as Professor of Law. This is the second occasion I have been asked to speak honoring Ed Cohen on his retirement and, knowing him well, I look forward to many more of his retirements in years ahead.

My assignment today is to provide a brief overview of issues in business taxation. I was tempted simply to repeat the program for this symposium, …

Retroactivity Revisited, Michael J. Graetz

Faculty Scholarship

In three prior articles, I considered transitional problems of changes the tax law. My general analysis and its specific application to the adoption of a consumption tax were criticized last year in this journal by Avishai Shachar. By taking liabilities explicitly into account in considering tax transition rules, Shachar extended the fundamental principles generated by my theory of legal transitions. Shachar, however, misunderstood or mischaracterized much of my earlier work.

In this comment, I respond briefly to Shachar's criticisms. In Part I, I set out the context and conclusions of my general theory and suggest that Shachar agrees with its …

To Praise The Estate Tax, Not To Bury It, Michael J. Graetz

Faculty Scholarship

For several decades, total revenues raised by estate and gift taxes have roughly equaled those raised by excise taxes on alcohol and tobacco. Yet no law journal has ever asked me to write on alcohol or tobacco excise taxes. The law firms of America do not routinely have divisions devoted to excise tax planning. We do not hear of the suffering of widows and orphans (or even of farmers and small businesses) because of alcohol and tobacco taxes. Philosophers and economists do not routinely debate the merits of such taxes. Perhaps most significantly, increases in such excise taxes do not …

The 1982 Minimum Tax Amendments As A First Step In The Transition To A "Flat-Rate" Tax, Michael J. Graetz

Faculty Scholarship

The massive body of tax legislation enacted in the first two years of the Reagan Administration offers little guidance for predicting the future direction of United States tax policy. Dramatically different Congressional coalitions – each led by the President – passed by very narrow margins the nation's largest tax reduction (the Economic Recovery Tax Act of 1981) and then the next year enacted the largest peacetime tax increase (the Tax Equity and Fiscal Responsibility Act of 1982). In each case, short-term political and fiscal concerns dominated the debates. The 1981 legislation reduced taxes in an effort to stimulate economic activity …

Implementing A Progressive Consumption Tax, Michael J. Graetz

Faculty Scholarship

Much scholarly debate has been devoted to the theoretical merits of using an individual's consumption expenditures as the basis for measuring ability to pay tax. In this Article, Professor Graetz examines the practical problems of implementing and administering a progressive consumption tax as an alternative to the income tax. He concludes that although a consumption tax is feasible, practical implementation difficulties, together with the political unlikelihood of enacting a tax which is both administratively workable and retains the alleged theoretical advantages of a consumption-based tax, argue against its adoption.

Assessing The Distributional Effects Of Income Tax Revision: Some Lessons From Incidence Analysis, Michael J. Graetz

Faculty Scholarship

In recent years public attention to issues of tax equity has increased dramatically. The testimony in January 1969 of outgoing Secretary of the Treasury Joseph Barr that 154 individuals who had adjusted gross incomes of more than $200,000 in 1966 paid no federal income tax intensified public awareness and concern about the equity of the tax system. Tax reform has remained a central issue of public policy.

At the same time, scholars working in the tax field have refined their methods of analyzing the impact on individuals and classes of individuals of tax laws and tax changes. Theoretical advances in …

Taxation Of Unrealized Gains At Death – An Evaluation Of The Current Proposals, Michael J. Graetz

Faculty Scholarship

The failure to tax the appreciation of capital assets transferred at death has been described as the major shortcoming of existing federal income tax laws. From time to time since 1942, the Department of the Treasury and others have urged alteration of the rule which underlies this failure. Recently the House Ways and Means Committee held panel discussions and public hearings on the subject of tax reform during which consideration was given to the possibility of changing the laws dealing with taxation of appreciated property at death. In its recommendations to the Committee, the Treasury Department did not push for …