Tax Law Commons^™

Overcoming Political Polarization: Federal Funding Of Education Is The Key, Reuven S. Avi-Yonah

Law & Economics Working Papers

The best way of overcoming political polarization in the US (the last two elections were both decided by fewer than 100,000 votes in WI, MI, PA (2016) and WI, AZ, GA (2020)) is to reduce disparities in education. But how can we do that?

The basic problem arises from the US system of funding K-12 education from property taxes. While the picture above refers to college education, it is K-12 education that determines both college admissions and college readiness.

Thus, the only viable solution is a federal solution. As President Nixon proposed in 1972, the United States should adopt an …

Recovery For Causing Tax Overpayment - Lyeth V. Hoey And Clark Revisited, Douglas A. Kahn, Jeffrey H. Kahn

Law & Economics Working Papers

The question has arisen in numerous cases as to the extent to which a settlement between arms’ length parties is dispositive in tax cases of the claims on which the settlement is based. Another issue that often arises is whether the receipt of compensation for a tax payment that was incurred because of the negligence of the payor is excluded from gross income. While those two issues were central to the proper resolution of a recent case in the United States Court of Appeals for the Eleventh Circuit, McKenny v. United States, the court failed even to note one of …

A Case For Higher Corporate Tax Rates, Edward G. Fox, Zachary D. Liscow

Law & Economics Working Papers

In this report, Fox and Liscow argue that, while conventional wisdom holds that we should lower taxes on corporations because of international competition, two recent changes militate in favor of higher corporate taxes, which would close the deficit, fund social programs, and reduce inequality. First, changes in tax law have increasingly targeted the corporate tax at economic “rents,” the supersized returns that businesses receive when they enjoy advantages like market power. Because taxing rents is progressive and does little to harm economic activity, a higher rate is justified. Second, shifts in the American economy have allowed companies to earn more …

Taxes In The Time Of Coronavirus: Is It Time To Revive The Excess Profits Tax?, Reuven S. Avi-Yonah

Law & Economics Working Papers

A recent NY Times headline summarizes one of the biggest economic impacts of the current pandemic: “Big Tech Could Emerge From Coronavirus Crisis Stronger Than Ever.” At a time when most American citizens and businesses suffer catastrophic economic damage from the Coronavirus Recession, some corporations such as Amazon, 3M, Gilead, and Zoom see their profits rise dramatically because of the pandemic. Given that most corporations are losing money but some are now earning excess profits due to the crisis, it is time to revive the wartime excess profits taxes that the US deployed in WW1 and WW2 to prevent the …

Covid-19 And Us Tax Policy: What Needs To Change?, Reuven S. Avi-Yonah

Law & Economics Working Papers

The COVID-19 Pandemic already feels like a historical turning point akin to Word Wars I and II and the Great Depression. It may signal the end of the second period of globalization (1980-2020) and a change in the relative positions of the US and China. It could also lead in the US to significant changes in tax policy designed to bolster the social safety net which was revealed as very porous during the pandemic. In what follows I will first discuss some short-term effects of the pandemic and then some potential longer-term effects on US tax policy.

Taxation And Business: The Human Rights Dimension Of Corporate Tax Practices, Reuven S. Avi-Yonah

Law & Economics Working Papers

If we want to narrow the North-South divide that threatens our world, some limits on tax competition are inevitable. The world faces a crucial choice in the 2020s. We can either continue retreating from globalization in favor of xenophobic nationalism, tariffs, immigration restrictions, and exchange controls. That road leads ultimately to war, as it did in the 1930s. Or we can revive globalization by investing in a robust social safety net, infrastructure, education, and job creation. While more needs to be done, we have made significant progress in curbing tax competition in the last decade. The key move now is …

Should Us Tax Law Be Constitutionalized? Centennial Reflections On Eisner V. Macomber (1920), Reuven S. Avi-Yonah

Law & Economics Working Papers

The US Supreme Court last decided a federal tax case on constitutional grounds in 1920, a century ago. The case was Eisner v. Macomber, and the issue was whether Congress had the power under the Sixteenth Amendment (authorizing an income tax, 1913) to include stock dividends in the tax base. The Court answered no because “income” in the Sixteenth Amendment meant “the gain derived from capital, from labor, or from both combined.” A stock dividend, since it did not increase the wealth of the shareholder, was not “income.” Macomber was never formally overruled, and it is sometime still cited by …

Why Study Tax History?, Reuven S. Avi-Yonah

Law & Economics Working Papers

This book review addresses the question why studying tax history is helpful to tax policy makers and practitioners.

Toward A 21st-Century International Tax Regime, Reuven S. Avi-Yonah

Law & Economics Working Papers

The OECD has been struggling to respond to countries that wish to tax large US technology companies on the basis of where their consumers live. The current OECD work program on digitalization is unlikely to produce a stable consensus or prevent countries from following the lead of France, India, Italy and the United Kingdom toward digital services taxes. The United States response should not be to target French, Indian, Italian or British companies for retaliation. Instead, the United States should consider adopting a sales-based formulary apportionment (SFA) solution that would apply to all large enterprises. Such a move is more …

If Not Now, When? Us Tax Treaties With Latin America After Tcja, Reuven S. Avi-Yonah

Law & Economics Working Papers

Since the 1990s, the US tax treaty network has expanded to include most large developing countries. However, there remains a glaring exception: The US only has two tax treaties in Latin America (Mexico and Venezuela), and one pending tax treaty (Chile). The traditional explanation for why the US has no treaty with, for example, Argentina or Brazil is the US refusal since 1957 to grant tax sparing credits to developing countries. Before the Tax Cuts and Jobs Act of 2017 (TCJA), this explanation was wrong, because the combination of deferral and cross-crediting meant that tax holidays in a source country …

Does Customary International Tax Law Exist?, Reuven S. Avi-Yonah

Law & Economics Working Papers

Customary international law is law that “results from a general and consistent practice of states followed by them from a sense of legal obligation.” “International agreements create law for states parties thereto and may lead to the creation of customary international law when such agreements are intended for adherence by states generally and are in fact widely accepted.” Does customary international law (CIL) exist in tax? There are over 3,000 bilateral tax treaties, and they are about 80% identical to each other, but do they create CIL that binds in the absence of a binding treaty, like for example the …

The International Provisions Of The Tcja: Six Results After Six Months, Reuven S. Avi-Yonah

Law & Economics Working Papers

Over six months have passed since the enactment of the TCJA, so it is now possible to reach some preliminary conclusions on its impact. The main ones are:

1. The transition tax plus anticipated GILTI tax minus territoriality have resulted in higher GAAP effective tax rates for 2017. In some cases they approach 35% for large multinationals with a lot of offshore income. For the first six months of 2018, however, overall corporate tax revenues are sharply down because of the 21% rate plus expensing. This is the exact reverse of the situation before TCJA in which MNEs showed very …

The Beat And Treaty Overrides: A Brief Response To Rosenbloom And Shaheen, Reuven S. Avi-Yonah, Brett Wells

Law & Economics Working Papers

In a recent paper posted on SSRN, Profs. David Rosenbloom and Fadi Shaheen argue that the Base Erosion Anti-Abuse Tax (BEAT) (IRC section 59A), as enacted in 2017, is a potential violation of Articles 23 and 24 of US tax treaties. In addition, they argue that the BEAT does not override those treaties and therefore the treaties can be relied upon to overcome the effects of the BEAT. In our opinion, this conclusion is wrong, for two reasons. First, we believe that the BEAT is not a treaty violation. Second, we believe that even if the BEAT were found to …

Perpetual Motion Machines: Esops Don’T Pay For Themselves, Andrew Stumpff Morrison

Law & Economics Working Papers

In this article, Stumpff addresses policy issues regarding employee stock ownership plans and demonstrates how some claims in support of ESOPS aren’t supported by the math.

Proposal For A Non-Subsidized, Non-Retirement-Plan, Employee-Owned Investment Vehicle To Replace The Esop, Sean M. Anderson, Andrew Stumpff Morrison

Law & Economics Working Papers

The authors have previously been critical of the existing American legal exemption and subsidy regime for employee stock ownership plans (“ESOPs”). By definition such plans create dangerously undiversified investment programs tying employees’ retirement security to the financial health of a single company – which, to compound the problem, is the employees’ employer, thereby correlating participants’ retirement security risk with the risk of losing their jobs. No demonstrated compensating policy benefit justifies this extraordinary large-scale departure from basic principles of financial prudence. One context, however, where a plausible case might be made for employee ownership is that which arises when a …

The Elephant Always Forgets: Us Tax Reform And The Wto, Reuven S. Avi-Yonah, Martin G. Vallespinos

Law & Economics Working Papers

The “Tax Cuts and Jobs Act” (TCJA) enacted on December 22, 2017 includes several provisions that raise WTO compliance issues. At least one such provision, the Foreign-Derived Intangible Income (FDII) rule, is almost certain to draw a challenge in the WTO and is likely to lead to another US loss and resulting sanctions. This outcome would be another addition to the repeated losses suffered by the US for export subsidies from the 1970s to 2004, which led to the imposition of sanctions and the ultimate repeal of the offending regime. The important question for 2018 and beyond is whether the …

Beat It: Tax Reform And Tax Treaties, Reuven S. Avi-Yonah

Law & Economics Working Papers

The Tax Cuts and Jobs Act (TCJA) includes several provisions that may be viewed as potential violations of US tax treaties. However, most of those potential violations, such as new IRC section 951A and to a large extent new IRC section 59A, are covered by the Savings Clause (US model article 1(4)). The only remaining question is whether IRC section 59A (the “Base Erosion Anti-Abuse Tax”, or BEAT) violates the non-discrimination provision (article 24), which is exempted from the Savings Clause. The answer is no, because foreign related parties are not comparable to US related parties receiving interest or royalties.

How Terrible Is The New Tax Law? Reflections On Tra17, Reuven S. Avi-Yonah

Law & Economics Working Papers

Overall, TRA17 is not much worse than TRA86 or TRA14. It increases the deficit, but not by an impossible amount; it is distributionally skewed, but less so than is usually assumed; and its details are not terrible (on the international side they are a big improvement over prior law). There is one big problem, the pass through provisions, and we can only hope that as its horrible implications unfold it will be a prime candidate for repeal.

The Elephant Always Forgets: Tax Reform And The Wto, Reuven S. Avi-Yonah

Law & Economics Working Papers

The “Tax Cuts and Jobs ACT” (TCJA) enacted on December 22, 2017, includes several provisions that raise WTO compliance issues. At least one such provision, the Foreign-Derived Intangible Income (FDII) rule, is almost certain to draw a challenge in the WTO and is likely to lead to another US loss and resulting sanctions. This outcome would be another addition to the repeated losses suffered by the US for export subsidies from the 1970s to 2004, which led to the imposition of sanctions and the ultimate repeal of the offending regime. The important question for 2018 and beyond is whether the …

Tit For Tat: How Will Other Countries React To The Tax Cuts And Jobs Act?, Reuven S. Avi-Yonah, Gianluca Mazzoni

Law & Economics Working Papers

The Tax Cuts and Jobs Act of 2017 (TRA17) represents the most comprehensive reform of US international tax rules since 1962. An important question in evaluating TRA17 is how US trading partners will respond to its provisions. In general, US trading partners may take steps to negate the competitive advantage gained by the US from the lower rate of corporate tax, expensing and the “patent box”. They may also take advantage of the participation exemption and the cross-crediting feature of GILTI to increase taxes on US multinationals. Finally, they are likely to copy the BEAT and apply it to US …

The Triumph Of Beps: Us Tax Reform And The Single Tax Principle, Reuven S. Avi-Yonah

Law & Economics Working Papers

The Tax Cut and Jobs Act (TRA17) as passed by the House on November 16 and by the Senate on December 2, 2017, contains multiple provisions that incorporate the principles of the OECD/G20 Base Erosion and Profit Shifting (BEPS) into domestic US tax law. Together with the changes in the 2016 model US tax treaty, these provisions mean that the US is following the EU and China in implementing BEPS and in particular its underlying principle, the single tax principle (i.e., all income should be subject to tax once: passive income at the residence state rate and active income at …

Once More, With Feeling: The 'Tax Cuts And Jobs' Act And The Original Intent Of Subpart F, Reuven S. Avi-Yonah, Nir Fishbien

Law & Economics Working Papers

For the first time since 1913, Congress is considering abandoning the principle that US residents should be subject to tax on all income “from whatever source derived.” Specifically, the House proposed tax reform legislation, the so-called “Tax Cuts and Jobs Act”, would completely exempt from US taxation dividends from “Controlled Foreign Corporations”. This is therefore a good occasion for considering the reasons we tax such dividends in the first place.

In the course of investigating the Stanley Surrey papers at the Harvard Law School Library, we discovered a remarkable report that support the view that the main impetus behind Subpart …

What A Difference Thirty Years Make: A Comparison Of The Tax Reforms Of 1986, 2014 And 2017, Reuven S. Avi-Yonah

Law & Economics Working Papers

This paper compares the Tax Cuts and Jobs Act of 2017, as passed by the House (TRA17H) and under consideration by the Senate (TRA17S) with two major previous efforts at comprehensive tax reform: The Tax Reform Act of 1986 (TRA86) and the draft tax reform proposed by former Ways and Means Chair David Camp (R-MI) (TRA14). It shows that TRA14 was quite similar to TRA86, but that TRA17 is very different than both. Congress should abandon TRA17 and go back to considering TRA14 on a bipartisan basis.

Are Taxes Converging?, Reuven S. Avi-Yonah, Gianluca Mazzoni

Law & Economics Working Papers

Eduardo Baistrocchi’s outstanding new book on tax treaty disputes is the result of an intense five-year global collaborative project among international tax scholars, practitioners and administrators. The book provides an unprecedented set of information and offers the first global qualitative and quantitative analysis on one of the most important debates over international tax scholarship across the last decades, that is, whether an international tax regime exists and is binding upon states as a matter of customary international law.

Slicing And Dicing: The Structural Problems Of The Tax Reform Framework, Reuven S. Avi-Yonah

Law & Economics Working Papers

The “Unified Framework for Fixing Our Broken Tax Code” (the “Framework”) released by the “Big Six” group of Treasury, White House and Congressional leaders on September 27 has been the focus of a lot of commentary. Most of the comments have focused on the distributive aspects of the plan and on the proposed rate structure, as well as the impact on revenues and the federal deficit. In this comment, I plan to focus instead on the structural aspects of the plan and in particular on the various new lines that it draws, because these are more likely to be lasting.

The Inexorable Rise Of The Vat: Is The Us Next?, Reuven S. Avi-Yonah

Law & Economics Working Papers

The rise of the Value Added Tax (VAT) from obscure beginnings in the 1950s to one of the most important taxes in the world (by revenue collected) is a story worth telling, and Kathryn James does a magnificent job in telling it in her new book. Despite its significance, very little is known about why so many countries have adopted the VAT and, in particular, why different countries adopt the types of VAT that they do. The popular mythology provides that the merits of the VAT have underpinned its global spread; however, this book contends that much scholarship on the …

With Marriage On The Decline And Cohabitation On The Rise, What About Marital Rights For Unmarried Partners?, Lawrence W. Waggoner

Law & Economics Working Papers

Part I of this paper uses recent government data to trace the decline of marriage and the rise of cohabitation in the United States. Between 2000 and 2010, the population grew by 9.71%, but the husband and wife households only grew by 3.7%, while the unmarried couple households grew by 41.4%. A counter-intuitive finding is that the early 21st century data show little correlation between the marriage rate and economic conditions. Because of the Supreme Court’s decision in Obergefell v. Hodges (2015), same-sex marriage is now universally available to same-sex couples. Part I considers the impact of same-sex marriage on …

Profits V. Purpose: Hybrid Companies And The Charitable Dollar, Rachel Culley, Jill R. Horwitz

Law & Economics Working Papers

Social entrepreneurship -- a catch-all term meaning harnessing business practices for social good -- has attracted people who want to “do well while doing good” for decades. Advocates of the idea have succeeded in blurring the boundaries among legal ownership types and inspired nonprofit/for-profit joint ventures, public-private partnerships, and the widespread privatization of traditional government functions and activities. The most recent manifestation of this trend is the creation of hybrid non-profit/for-profit firms. In the United States, the Low-Profit Limited Liability Company (L3C) is growing, and there are similar firms in the United Kingdom and Canada. In this paper we address …

Congress Promotes Perpetual Trusts: Why?, Lawrence W. Waggoner

Law & Economics Working Papers

This posting updates the article titled Congress Promotes Perpetual Trusts: Why?. The article was originally posted on SSRN in September 2013. The updated version incorporates a discussion of two new developments—the unveiling of the long-awaited House Ways and Means Committee’s proposal for comprehensive tax reform and the issuance of the president’s proposed budget for 2015. Both of these new developments are disappointing because neither proposes curtailing or effectively curtailing perpetual trusts. By unwittingly granting a tax exemption for perpetual trusts, Congress undermined state perpetuity law and promoted private trusts that can last and remain tax exempt for many centuries and …

From Here To Eternity: The Folly Of Perpetual Trusts, Lawrence W. Waggoner

Law & Economics Working Papers

Trusts that can operate for as many as a thousand years or even forever, typically for the benefit of the settlor’s descendants living from time to time, now and in the future, are all the rage in banking and estate-planning circles. Before 1986, when Congress passed the federal generation-skipping transfer tax (GST tax), settlors had little incentive and probably little desire to establish perpetual trusts, even though they were permitted to do so under the law of Wisconsin, South Dakota, or Idaho. The GST tax created an artificial incentive for the wealthy to establish such trusts. The origin of the …