Tax Law Commons^™

The Parallel March Of The Ginis: How Does Taxation Relate To Inequality And What Can Be Done About It?, Reuven S. Avi-Yonah

Law & Economics Working Papers

The United States currently has one of the highest levels of inequality among industrialized economies. In addition, numerous scholars have shown that social mobility in the United States is significantly lower than it was in the period between 1945 and 1970, when inequality was also declining. The combination of these trends is dangerous because it risks transforming the US into a society where small elites capture most of the gains, a pattern in which growth cannot be sustained over time (Acemoglu and Robinson 2012, Zingales 2012). The level of inequality in the US after taxes and transfers are taken into …

The Devil In The Details: Reflections On The Tax Reform Act Of 2014, Reuven S. Avi-Yonah

Law & Economics Working Papers

The Discussion Draft of the “Tax Reform Act of 2014” (TRA14) released by US House Committee on Ways and Means Chairman Dave Camp (R-MI) on February 26, 2014 represents a major effort for fundamental and far reaching reform of US tax law. Unfortunately, while many parts of the proposal seem quite sensible as an effort to bring back the “spirit of 1986”, the international tax reform proposals are deeply flawed and based on obsolete assumptions on the world facing US multinationals in 2014.

Overall, TRA14 represents a welcome effort to propose a revenue neutral combination of base broadening and rate …

Just Say No: Corporate Taxation And Corporate Social Responsibility, Reuven S. Avi-Yonah

Law & Economics Working Papers

This article will address the question whether publicly traded US corporations owe a duty to their shareholders to minimize their corporate tax burden in any way that they may be able to get away with from a purely legal perspective. First, however, to render the subsequent discussion a bit more concrete, I will describe a recently unveiled case study of corporate tax aggressiveness.

Understanding The Amt, And Its Unadopted Sibling, The Amxt, James R. Hines Jr., Kyle Logue

Law & Economics Working Papers

U.S. taxpayers are currently required to pay the greater of their liabilities under the regular income tax and their liabilities under the Alternative Minimum Tax (AMT). Despite its unpopularity, the AMT serves the function of permitting Congress to offer tax preferences for certain activities and expenditures while maintaining a progressive tax system. This paper examines this role of the AMT, and explores the possibility of adding an Alternative Maximum Tax (AMxT) that would augment the impact of the AMT. An AMxT limits a taxpayer’s liability to the minimum of the amount due under the regular income tax and the amount …

Territoriality: For And Against, Reuven S. Avi-Yonah

Law & Economics Working Papers

This article will survey the main arguments for and against territoriality and conclude that it is the wrong way to go in the short run, but can perhaps be adopted in the medium to long run in conjunction with more fundamental international tax reform. The main reason that territoriality should not be adopted now is that the OECD may be about to recommend worldwide consolidation for all its members as part of the Base Erosion and Profit Shifting (BEPS) project, and if the OECD does that, all of the standard arguments in favor of territoriality and against abolishing deferral disappear.

Unitary Taxation And International Tax Rules, Reuven S. Avi-Yonah

Law & Economics Working Papers

Any proposal to adopt Unitary Taxation (UT) of multinationals has to contend with whether such taxation is compatible with existing international tax rules and in particular with the bilateral tax treaty network. Indeed, some researchers have argued that the separate accounting (SA) method and the arm’s length standard are so embodied in the treaties that they form part of customary international law and are binding even in the absence of a treaty. In this paper we will argue that UT can be compatible with most of the existing tax treaties, and that developing countries in particular can implement it in …

And Yet It Moves: A Tax Paradigm For The 21st Century, Reuven S. Avi-Yonah

Law & Economics Working Papers

A central premise of tax scholarship of the last thirty years has been the greater mobility of capital than labor. Recently, scholars such as Edward Kleinbard have recommended that the US adopt a variant of the 'dual income tax' model used by the Scandinavian countries, under which income from capital is subject to significantly lower rates than labor income because of its supposedly greater mobility. This article argues that the premise upon which this argument is built is mistaken, because for individual US taxpayers (as opposed to corporations), there are significant limitations on their ability to avoid tax by moving …

A Proposed Replacement Of The Tax Expenditure Concept And A Different Perspective On Accelerated Depreciation, Douglas A. Kahn

Law & Economics Working Papers

The thesis of this article is that the tax expenditure concept is grounded on an erroneous vision of the structure of an income tax system. The tax expenditure concept adopts a binary view of income taxation. It posits that there is an ideal or pure income tax system whose provisions are elements of the normal structure of that system without any influence from non-tax policy considerations. Tax provisions are described either as falling within those core provisions or outside of them. There are no other categories. To the contrary, this article contends that tax provisions lie on a continuum in …

Double Or Nothing: A Tax Treaty For The 21st Century, Reuven S. Avi-Yonah, Oz Halabi

Law & Economics Working Papers

The current tax treaty network was developed in the 1920s and 1930s in order to prevent double residence/source taxation. This kind of double taxation rarely exists any more because most countries have adopted either an exemption system or a foreign tax credit regime in their domestic (non‐treaty) law, which effectively prevents residence/source double taxation even in the absence of a treaty. Instead, as Tsilly Dagan has pointed out, the current treaties serve mostly to transfer revenue from the source country to the residence country. This suggests that treaties may be unnecessary because exemption from withholding taxes by source countries can …

"Perpetual Trusts: The Walking Dead" And "Congress Should Effectively Curb Gst Exemption For Perpetual Trusts.", Calvin H. Johnson, Lawrence W. Waggoner

Law & Economics Working Papers

In separate but complementary letters to the editor of Tax Notes, Calvin Johnson (University of Texas School of Law) and Lawrence Waggoner (University of Michigan Law School) respond to an article by Dennis Belcher and seven other practicing attorneys that defend the GST exemption for perpetual trusts. In Federal Tax Rules Should Not Be Used to Limit Trust Duration, 126 Tax Notes 832 (Aug 13, 2012), the attorneys argue that the duration of a trust is a state law issue. Their article is actually a response to a Shelf Project article: Lawrence W. Waggoner, Effectively Curbing the GST Exemption for …

Sales Between A Partnership And Non-Partners, Douglas A. Kahn

Law & Economics Working Papers

Kahn argues that a 1986 amendment to section 707 invalidated several regulatory provisions promulgated under section 267.

Contribution Of A Built-In Loss To A Partnership, Douglas A. Kahn

Law & Economics Working Papers

In 2004 Congress amended the code to prevent the use of a partnership contribution as a means of transferring a deduction for a built-in loss from one person to another. That amendment has undermined the application of the remedial method (and the traditional method with curative allocations) that the regulations provide for the allocation of a contributed built-in gain or loss, Kahn argues. He also asserts that the 2004 amendment distorts income reporting.

Effectively Curbing The Gst Exemption For Perpetual Trusts, Lawrence W. Waggoner

Law & Economics Working Papers

Current law allows a married couple to transfer up to $10.24 million into a trust that is exempt from the federal generation-skipping transfer tax. The proposal would deny the GST exemption prospectively, unless the trust must terminate within one of three perpetuity periods: (1) 21 years after the death of a life in being; (2) 90 years after creation; or (3) after the death of the last living beneficiary who is no more than two generations younger than the settlor. Atrust now in existence would be allowed a grace period during which it could be modified to terminate within the …

International Taxation And Competitiveness: Introduction And Overview, Reuven S. Avi-Yonah, Nicola Sartori

Law & Economics Working Papers

The debate about whether to abolish deferral or to adopt territoriality has been going on ever since the Kennedy Administration first proposed ending deferral in 1961. The problem is that neither side has factual support for their argument about whether the U.S. tax system, including Subpart F, as currently enacted or with any of the proposed reforms, in fact negatively impacts the tax burden of US-based MNEs. Even the concept of competitiveness itself is unclear. Despite numerous claims, there has been no rigorous attempt that we are aware of to determine whether MNEs based in our major trading partners in …

U.S. Treaty Anti-Avoidance Rules: An Overview And Assessment, Reuven S. Avi-Yonah, Oz Halabi

Law & Economics Working Papers

In this article, the authors provide a summary of the anti-avoidance rules in the United States that relate to bilateral tax treaties. Specifically, they focus on treaty-based anti-avoidance rules and discuss whether or not a General Anti-Avoidance Rule would be appropriate in this context.

The Effective Tax Rate Of The Largest Us And Eu Multinationals, Reuven S. Avi-Yonah, Yaron Lahav

Law & Economics Working Papers

This paper compares the effective tax rates of the 100 largest US multinationals to the 100 largest EU multinationals for the period 2001-2010, based on financial disclosures. The paper finds that despite the higher US statutory rate the effective tax rates are comparable and that EU multinationals tend to have a higher effective tax rate. The likely explanation is that EU corporate taxes have a broader base. The paper concludes that current US tax law does not subject US based multinationals to a competitive disadvantage against their EU based competitors.

Exclusion From Income Of Compensation For Services And Pooling Of Labor Occurring In A Noncommercial Setting, Douglas A. Kahn

Law & Economics Working Papers

Compensation for services, regardless of the form, constitutes income to the recipient. Consequently, the exchange of services by two individuals is treated as income to each. However, there are numerous examples of an exchange of services that the IRS has never sought to tax. The most common example is an exchange of services by a married couple who divide the household chores between them. The focus of this article is to propose a principled reason for not taxing those exchanges and to explore the limits of that exclusion. The author contends that the income tax operates exclusively on commercial transactions, …

Real Time Audit – It Is The Time To Act?, Reuven S. Avi-Yonah, Oz Halabi

Law & Economics Working Papers

The U.S. is facing one of its hardest economic crises. Its economy has not recovered from the 2008 downturn, and the light at the end of the tunnel is far, far away. The government and the Internal Revenue Service (“IRS”) are seeking revenue sources in order to reduce its budget deficit. However, raising the income tax rates is politically difficult and may lead to further loss of jobs. In this political situation, it is important to try to find ways to raise more revenue without raising tax rates. One possibility of doing so is “real time audit”: Auditing transactions when …

Money On The Table: Why The U.S. Should Tax Inbound Capital Gains, Reuven S. Avi-Yonah

Law & Economics Working Papers

In 1992, Chairman Rostenkowski introduced legislation that imposed US capital gains tax on foreign sellers of large blocks of shares (10 percent or more) in US corporations. The legislation was not a treaty override, although it added an anti-treaty shopping provision similar to those adopted for the branch profit tax in 1986. It also had anti-abuse provisions that addressed holding company structures. Today, the US faces a large budget deficit and seeks to impose higher burdens on its own multinationals. While that is also justified, there is no reason to let foreigners off the hook, especially since there is much …

Déjà Vu All Over Again? Reflections On Auerbach's 'Modern Corporate Tax', Reuven S. Avi-Yonah

Law & Economics Working Papers

This paper comments on Alan Auerbach's "A Modern Corporate Tax" (Hamilton Project/CAP, December 2010) and argues that it is not a significant improvement over previous proposals to replace the corporate tax with a cash flow tax.

The Case For Dividend Deduction, Reuven S. Avi-Yonah, Amir C. Chenchinski

Law & Economics Working Papers

There have been various proposals made in the past two decades to integrate the corporate and shareholder tax, including dividend exemption, imputation, and the Comprehensive Business Income Tax (CBIT). In our view, the problem with all of these proposals is that they omit to ask the crucial question of why we should tax business entities in the first place. Taxes, the economists tell us, are always borne by human beings, not by legal entities. Why should legal entities, be they corporations or other forms of business entity, be subject to tax at all? Would it not be easier to just …

Taxation As Regulation: Carbon Tax, Health Care Tax, Bank Tax And Other Regulatory Taxes, Reuven S. Avi-Yonah

Law & Economics Working Papers

This paper addresses three questions: 1. Is regulation a legitimate goal for taxation? 2. Which tax is best suited for regulation? 3. Would it be better to allocate just one goal per tax among the major taxes (individual and corporate income tax and VAT)? It then analyzes the proposed bank tax and the enacted health care tax as regulatory taxes, and concludes that the first is desirable (as is a carbon tax) but the second is not.

The Redemption Puzzle, Reuven S. Avi-Yonah

Law & Economics Working Papers

Following the adoption of partial integration in 2003, there was only a modest increase in dividends during the period 2004-7, from about 300 to about 500 (if 1987 levels are set at 100). Redemptions, however, showed a remarkable increase, jumping from about the same as dividends (300) to 1,800. This, therefore, leads to a new puzzle: Why the sudden sharp increase in redemptions following 2003?

Like the dividend puzzle, the redemption puzzle is susceptible to several explanations. For example, Bratton and Wachter note that managers who hold stock options tend to favor redemptions over dividends. But in this case, I …

The Case Against Taxing Citizens, Reuven S. Avi-Yonah

Law & Economics Working Papers

The US is the only developed country to tax citizens living permanently overseas on their worldwide income. This rule was created at a time when the income tax applied only to the rich and when some of the rich moved overseas to avoid the draft. We do not have a draft any more, the income tax applies to the middle class, and many more US citizens live permanently overseas for non-tax reasons. In a globalized world, citizenship-based taxation is an anachronism which should be abandoned.

Narrowing The Tax Gap Through Presumptive Taxation, Kyle D. Logue, Gustavo G. Vettori

Law & Economics Working Papers

This Article highlights the primary tax enforcement problem in the United States, that of noncompliant small and medium-sized businesses (“SMBs”), and it explores the possibility of a radical solution: shifting away from the current system, which attempts to tax the actual income of each business, and toward a system that taxes only a rough approximation (or probabilistic estimate) of business income. This sort of presumptive tax approach has been used for years in developing economies, where the problem of SMB noncompliance is even worse than in the U.S. This Article argues that the time has come to at least consider …