Tax Law Commons^™

Social Enterprise: Who Needs It?, Brian Galle

Georgetown Law Faculty Publications and Other Works

State statutes authorizing firms to pursue mixtures of profitable and socially-beneficial goals have proliferated in the past five years. In this invited response essay, I argue that for one large class of charitable goals the so-called “social enterprise” firm is often privately wasteful. While the hybrid form is a bit more sensible for firms that combine profit with simple, easily monitored social benefits, existing laws fail to protect stakeholders against opportunistic conversion of the firm to pure profit-seeking. Given these failings, I suggest that social enterprise’s legislative popularity can best be traced to a race to the bottom among states …

Carrots, Sticks, And Salience, Brian Galle

Georgetown Law Faculty Publications and Other Works

This Article considers the second-best design of Pigouvian taxes and subsidies in the presence of agents who are imperfectly aware of the instrument. Until very recently, the price instrument literature has assumed perfect rationality, and even the handful of prior attempts to account for “hidden” prices focus mainly on the income tax. I extend these efforts in several directions. First, I show that the best available instrument for correcting negative externalities is often one whose price is partially adjusted upwards -- or, in the case of subsidies, downwards -- to counter-act the neglect of irrational actors. In addition, I argue …

No Small Feat: Who Won The Health Care Case (And Why Did So Many Law Professors Miss The Boat)?, Randy E. Barnett

Georgetown Law Faculty Publications and Other Works

In this essay, prepared as the basis for the 2013 Dunwody Distinguished Lecture in Law at the Fredric G. Levin College of Law, University of Florida, I describe five aspects of the Supreme Court’s decision in NFIB v. Sebelius that are sometimes overlooked or misunderstood. (1) The Court held that imposing economic mandates on the people was unconstitutional under the Commerce and Necessary and Proper Clauses; (2) Whether viewed from a formalist or realist perspective, Chief Justice Roberts’ reasoning was the holding in the case; (3) The Court did not uphold the constitutionality of the individual insurance mandate under the …

Does Swiss Bank Secrecy Violate International Human Rights?, Stephen B. Cohen

Georgetown Law Faculty Publications and Other Works

Prof. Stephen Cohen, whose academic specialty is taxation, also has an interest in international human rights and served as Deputy Assistant Secretary of State for Human Rights in the Carter administration. In this comment, Prof. Cohen asks whether states like Switzerland, which provide bank secrecy for the offshore accounts of wealthy citizens of developing countries, violate internationally recognized human rights. The United Nations Covenant on Economic, Social, and Cultural Rights explicitly recognizes rights to adequate food, clothing, housing, health care, clean water, sanitation, and education. Bank secrecy has a significant human rights impact if it deprives developing countries of tax …

Taxation, Risk, And Portfolio Choice: The Treatment Of Returns To Risk Under A Normative Income Tax, John R. Brooks

Georgetown Law Faculty Publications and Other Works

Many articles in the legal and economic literature claim that a pure Haig-Simons income tax cannot effectively tax investment income. This is because an investor can use leverage to gross up her investments in risky assets such that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risk-taking. This article argues, however, that while it is possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so.

Central to any discussion of the effects of taxation on investment risk-taking is the meaning …

Anonymous Withholding Agreements And The Future Of International Cooperation In Taxing Foreign Financial Accounts : Testimony Before The Finance Committee Of The German Bundestag, September 24, 2012 (Statement By Associate Professor Itai Grinberg, Geo. U. L. Center), Itai Grinberg

Georgetown Law Faculty Publications and Other Works

Chairwoman Reinemund and members of the Finance Committee, this testimony will make three key points:

• Automatic information exchange is superior to anonymous withholding for the purpose of combating tax evasion involving the use of foreign financial accounts.

• German ratification of the Swiss-German anonymous tax withholding agreement would stifle the emergence of a multilateral automatic information exchange system. As a result, Germany would be less able to address its own concerns with tax evasion through foreign accounts over the medium term. By ratifying this agreement, Germany would also slow the development of a multilateral system that would allow many …

The Hidden Limits Of The Charitable Deduction: An Introduction To Hypersalience, Lilian V. Faulhaber

Georgetown Law Faculty Publications and Other Works

Behavioral economics introduced the concept of salience to law and economics. In the area of tax policy, salience refers to the prominence of taxes in the minds of taxpayers. This article complicates the literature on salience and taxation by introducing the concept of “hypersalience,” which is in many ways the mirror image of hidden taxation. While a revenue-raising tax provision must be hidden for taxpayers to underestimate their tax bill, a revenue-reducing tax provision – such as a deduction, exclusion, or credit – must be more than fully salient for taxpayers to underestimate their tax bill. In other words, the …

The Tragedy Of The Carrots: Economics & Politics In The Choice Of Price Instruments, Brian Galle

Georgetown Law Faculty Publications and Other Works

Externalities are one of the most fundamental market-failure justifications for government action, and pigouvian taxes and subsidies are standard tools for correcting them. Even so, neither the legal nor economic literatures offer any comprehensive account of when policy makers should prefer one to the other. This Article takes up that task. Prior efforts to distinguish between “carrots” and “sticks” have generally been limited to the context of pollution regulation, and I show here that even those are incomplete. I also extend the analysis to the case of positive externalities, where there is no prior literature to speak of. Overall I …

The Role Of Charity In A Federal System, Brian Galle

Georgetown Law Faculty Publications and Other Works

This Article critiques the prevailing justification for subsidies for the charitable sector, and suggests a new alternative. According to contemporary accounts, charity corrects the failure of the private market to provide public goods, and further corrects the failure of government to provide goods other than those demanded by the median voter.

However, the claim that government can meet the needs only of a single “median voter” neglects both federalism and public choice theory. Citizens dissatisfied with the services of one government can move to or even create another. Alternatively, they may use the threat of exit to lobby for local …

The Battle Over Taxing Offshore Accounts, Itai Grinberg

Georgetown Law Faculty Publications and Other Works

The international tax system is in the midst of a contest between automatic information reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. At stake is the extent of many countries’ capacity to tax investment income of individuals and profits of closely held businesses through an income tax in an increasingly financially integrated world.

Incongruent initiatives of the European Union, the Organisation for Economic Cooperation and Development (OECD), Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore …

Doing Too Much: The Standard Deduction And The Conflict Between Progressivity And Simplification, John R. Brooks

Georgetown Law Faculty Publications and Other Works

In U.S. federal income tax, the standard deduction, along with the personal exemptions, provides taxpayers with a minimum amount of untaxed income, effectively creating a "zero bracket amount." For historical and political reasons, however, the standard deduction also operates as a simplified substitute for the itemized deductions, such as the deductions for extraordinary medical expenses, charitable contributions, and home mortgage interest. This seemingly reasonable compromise in fact leads to substantial, and surprising, conceptual complexity. In particular, close analysis of each of the two roles shows that their effects, and related criticisms, are often contradictory, which in turn makes it difficult, …

So Much For The Commerce Clause Challenge To Individual Mandate Being "Frivolous", Randy E. Barnett

Georgetown Law Faculty Publications and Other Works

Remember when the Commerce Clause challenge to the individual insurance mandate was dismissed by all serious and knowledgeable constitutional law professors and Nancy Pelosi as "frivolous"? Well, as Jonathan notes, the administration is now apparently telling the New York Times that the individual insurance "requirement" and "penalty" is really an exercise of the Tax Power of Congress.

Keep Charity Charitable, Brian Galle

Georgetown Law Faculty Publications and Other Works

This Article responds to recent claims, most prominently by Anup Malani, Eric Posner, and Todd Henderson, that much of the work of the charitable sector should be farmed out to for-profit firms. For-profit firms are said to be more efficient because they can offer high-powered incentives to cut costs. I argue, however, that because of the high costs of monitoring and the presence of externalities, low-powered incentives are preferable for firms that produce public goods, as most charities do. Further, allowing some for-profit firms to receive charitable subsidies would raise the cost of producing those goods in government or other …

Sovereignty, Integration And Tax Avoidance In The European Union: Striking The Proper Balance, Lilian V. Faulhaber

Georgetown Law Faculty Publications and Other Works

As the need to raise revenue becomes more pressing and public opposition to tax avoidance increases, the European Court of Justice has made it more difficult for the twenty-seven Member States of the European Union to prevent tax avoidance and shape fiscal policy. This article introduces the new anti-avoidance doctrine of the European Court of Justice and analyzes it from the perspective of taxpayers, Member States and the European Union legal order as a whole. This doctrine is problematic becasue it has created a legislative vacuum in Europe. No European Union institution has the authority to regulate direct taxation without …

Is Local Consumer Protection Law A Better Retributive Mechanism Than The Tax System, Brian Galle

Georgetown Law Faculty Publications and Other Works

As Judge Calabresi has argued, preemption decisions are, at their core, a choice about which tier of government should have policy-making authority. In prior work, Mark Seidenfeld and I argued that the choice of whether or not to preempt state law decisions should be based explicitly on "fiscal federalism" considerations. The economic discipline of fiscal federalism attempts to measure the welfare effects of situating a given policy either locally, nationally, or somewhere in between.

Governing Board Accountability: Competition, Regulation And Accreditation, Judith C. Areen

Georgetown Law Faculty Publications and Other Works

This article examines the three primary ways in which the governing boards of American colleges and universities are held to account: (1) competition; (2) regulation, including state nonprofit corporation laws, tax laws, and licensing laws; and (3) accreditation. It begins by tracing how lay (meaning nonfaculty) governing boards became the dominant form of governance in American higher education. It argues that governing boards provide American institutions of higher education with an exceptional degree of autonomy from state control and that, together with the shared governance approach that gives faculties primary responsibility for academic matters, they have been a vital factor …

Taxes And Death: The Rise And Demise Of An American Law Firm, Milton C. Regan

Georgetown Law Faculty Publications and Other Works

Misconduct by lawyers in law firms is often attributed to pressures from increasing competition for legal services. Modern firms do face fierce competitive pressures. We can gain more subtle insights, however, by focusing on the specific markets in which particular firms operate and the ways in which forms of influence in law firms interact with common patterns of behavior in organizations.

This paper, a chapter in the collection Law Firms, Legal Culture, and Legal Practice, draws on this type ofanalytical framework to provide a case study of the experience of Jenkens & Gilchrist, a national law firm that had …

Where Credit Is Due: Advantages Of The Credit-Invoice Method For A Partial Replacement Vat, Itai Grinberg

Georgetown Law Faculty Publications and Other Works

If a value-added tax (VAT) were chosen to supplement or replace some portion of the revenue from the income tax, a choice would likely be made between the credit-invoice method and the subtraction-method for calculating VAT liability. Credit-invoice method VATs and subtraction-method VATs are, at a conceptual level, very similar taxes. The key substantive difference between most subtraction-method VAT proposals and extant credit-invoice method VATs is that subtraction-method VAT proposals generally do not impose an invoice requirement. The invoice requirement substantially reduces tax avoidance opportunities in the VAT, and also ensures the ability to provide appropriate treatment for exports while …

The Misuse Of Textualism: A Further Reply To Prof. Kahn, Stephen B. Cohen

Georgetown Law Faculty Publications and Other Works

Because readers have already endured four articles, two by me and two by Prof. Douglas A. Kahn, debating the meaning of section 67(e)(1), I am reluctant to respond to Prof. Kahn’s rejoinder, which appeared in the January 18 issue of Tax Notes. Nevertheless, our disagreement implicates the judicial craft of two U.S. Supreme Court members, Chief Justice John Roberts and Justice Sonia Sotomayor. I therefore feel it important to answer Prof. Kahn’s latest contentions, recognizing my duty to be as brief as possible.

The Lds Church, Proposition Eight, And The Federal Law Of Charities, Brian Galle

Georgetown Law Faculty Publications and Other Works

This brief Commentary considers the merits of the argument that the Mormon Church's support for Proposition Eight violated federal tax law. I take as given the facts reported by the New York Times and other major news outlets. Although the facts are not really in dispute, much of the underlying law is. There are few clear guidelines governing lobbying by charities. In the end it is impossible to say with certainty whether the Church's conduct will have any tax-law repercussions. My conclusion that there is uncertainty, though, stands in contrast with existing claims that the expenditures of the LDS Church …

Hidden Taxes, Brian Galle

Georgetown Law Faculty Publications and Other Works

The idea of hidden taxes is as old as John Stuart Mill, but convincing evidence of their existence is new. In this Article, I survey and critique recent studies that claim to show that there are some taxes that can go unnoticed by those who pay them. I also develop the array of unanswered theoretical questions and policy implications that potentially follow from the studies' results.

Probably the central question for hidden taxes is whether they might enable government to raise revenue without also distorting the economy. If so, I argue, they have the potential to radically refashion the architecture …

Tax Penalties And Tax Compliance, Michael Doran

Georgetown Law Faculty Publications and Other Works

This paper examines the relationship between tax penalties and tax compliance. Conventional accounts, drawing from deterrence theory and norms theory, assume that the relationship is purely instrumental--that the function of tax penalties is solely to promote tax compliance. This paper identifies another aspect of the relationship that generally has been overlooked by the existing literature: the function of tax penalties in defining tax compliance. Tax penalties determine the standards of conduct that satisfy a taxpayer's obligations to the government; they distinguish compliant taxpayers from non-compliant taxpayers. This paper argues that tax compliance in a self-assessment system should require the taxpayer …

Managers, Shareholders, And The Corporate Double Tax, Michael Doran

Georgetown Law Faculty Publications and Other Works

The United States generally imposes two levels of federal income tax on corporate profits. The first level taxes income to the corporation; the second level taxes dividends to the shareholders. Academics and policymakers have long considered this double tax to be "unusual, unfair, and inefficient." Legislators from both political parties have proposed integration of the corporate and individual income taxes on many occasions, but the proposals consistently fail. Prior academic analyses have struggled to explain the failure of integration. This paper demonstrates how certain managers, shareholders, and collateral interests rationally favor certain integration proposals and oppose other integration proposals, while …

Does Brummeria Sweep Clean? A U.S. Tax-Law Perspective, Stephen B. Cohen

Georgetown Law Faculty Publications and Other Works

The title of this article draws on the sixteenth-century Irish proverb, 'a new broom sweeps clean'. It asks whether the recent judgment in Commissioner for the South African Revenue Service v Bruinmeria Renaissance Ltd sweeps clean in the sense of improving the income tax.

The taxpayer, Brummeria Renaissance Ltd, operated a retirement village. A resident of the village would provide a loan to the company interest-free, that is, with zero stated interest. In return, the company would provide the resident with the right to occupy housing in the retirement village. When the resident vacated the housing, the company was obligated …

Whom Do You Trust? A Reply To Prof. Kahn, Stephen B. Cohen

Georgetown Law Faculty Publications and Other Works

In his 2008 opinion in Knight v. Commissioner, Chief Justice John Roberts harshly criticized then Court of Appeals Judge Sonia Sotomayor, writing that her approach to the Internal Revenue Code “flies in the face of the statute.” In the August 3 issue of Tax Notes, I argued that Roberts’ criticism of Sotomayor was “logically flawed and unwarranted.” In the September 21 issue of Tax Notes, Prof. Douglas Kahn defended Robert’s criticism of Sotomayor as “persuasive and accurate” and attacked Sotomayor’s opinion in the case and my defense of what she wrote. I believe that Prof. Kahn’s arguments in defense of …

Judge Sonia Sotomayor’S Tax Opinions, Stephen B. Cohen

Georgetown Law Faculty Publications and Other Works

Judge Sonia Sotomayor has written three published opinions on federal taxation, one as a District Court judge and two as a Court of Appeals judge. Two of the opinions deal with routine matters and are unremarkable in the sense that it is difficult to imagine the cases coming out any other way. Her third opinion, however, in William L. Rudkin Testamentary Trust v. Commissioner, 467 F.3d 149 (2d Cir. 2006), aff'd sub nom. Knight v. Commissioner, 552 U.S. 181, 128 S. Ct. 782 (2008), generated a sharp difference of opinion with Chief Justice Roberts. Although Chief Justice Roberts, writing for …

Time To Start Over On Deferred Compensation, Michael Doran

Georgetown Law Faculty Publications and Other Works

Writing good regulations--"good" in the sense of promoting the public interest--always presents challenges. Regulators must hit a small but important target where private conduct is brought within appropriate government control, but unnecessary compliance burdens and other deadweight costs are minimized. Even if they see the government's objectives clearly, regulators often have only a limited understanding of the underlying private activities. Moreover, regulators may be unaware of how their rules disrupt or distort those activities in socially harmful ways.

Regulators occasionally hit the target exactly. More often, they miss--though not by an intolerably wide margin (good enough for government work, as …

Tax Fairness, Brian Galle

Georgetown Law Faculty Publications and Other Works

This Article argues that, contrary to the consensus of economists and many legal scholars, the norm of "horizontal equity" in taxation has independent meaning as a default rule in favor of existing arrangements. Although it has long been said, and widely thought, that tax should be fair in its dealings with individuals who are situated similarly to one another, no one has been able to say convincingly just what that fairness comprises. As a result, the learned referees in the last major dispute over the significance of horizontal equity judged that fairness's critic had decidedly won the day. Since then, …

Federal Fairness To State Taxpayers: Irrationality, Unfunded Mandates, And The 'Salt' Deduction, Brian Galle

Georgetown Law Faculty Publications and Other Works

By sheer dollars alone, the largest impact of the Alternative Minimum Tax is to deny many taxpayers the deduction for the taxes they paid to their state and local governments under § 164 of the Internal Revenue Code. This Article provides a fine-grained analysis of the overall fairness of the state- and local-tax deduction ¿ and, by implication, the fairness of its partial repeal through the Alternative Minimum Tax. I offer for the first time a close examination of how newly understood limits on taxpayer mobility and rationality might affect individuals' choices of bundles of local taxes and local government …

Time To Start Over On Deferred Compensation, Michael Doran

Georgetown Law Faculty Publications and Other Works

Government regulators would do well to follow simple heuristics like that. Writing good regulations--"good" in the sense of promoting the public interest--always presents challenges. Regulators must hit a small but important target where private conduct is brought within appropriate government control, but unnecessary compliance burdens and other deadweight costs are minimized. Even if they see the government's objectives clearly, regulators often have only a limited understanding of the underlying private activities. Moreover, regulators may be unaware of how their rules disrupt or distort those activities in socially harmful ways.

Regulators occasionally hit the target exactly. More often, they miss--though not …