Taxation-Federal Commons^™

Opportunity Zones: A Program In Search Of A Purpose, Ofer Eldar, Chelsea Garber

Faculty Scholarship

In 2017, Congress created the Opportunity Zone (“OZ”) program to stimulate economic growth in low-income communities. The program was characterized by its unprecedented scale relative to previous place-based development efforts and was described as “perhaps the most ambitious economic development tool to come out of Congress in a generation.” However, the program was quickly criticized on numerous grounds, and its design flaws are so severe that several legislators have called for its reform or repeal.

This Essay argues that the root of the OZ program’s problems is a strong mismatch between its stated purpose and its actual terms. We discuss …

Giving Credits Where Credits Are (Arguably) Due: A Half Century's Evolution In The Design Of Personal Tax Expenditures, Lawrence Zelenak

Faculty Scholarship

In the late 1960s, when Stanley Surrey introduced the concept of tax expenditures and the federal government began producing tax expenditure budgets, personal tax expenditures in the form of deductions (for nonbusiness interest, charitable donations, state and local taxes, and medical expenses) equaled roughly 1.2% of gross domestic product, and personal tax expenditures in the form of credits were virtually nonexistent. Although Surrey was critical of all tax expenditures, he had particular scorn for tax expenditures in the form of deductions, which he characterized as upside-down subsidies. He explained that converting deduction tax expenditures to credits would make them less …

Tax Law’S Workplace Shift, Shu-Yi Oei, Diane M. Ring

Faculty Scholarship

In December 2017, Congress passed major tax reform. The reform included an important new provision that granted independent contractors and other pass-through taxpayers—but not employees or corporations—a potential tax deduction equal to 20% of their qualified business income. Critics have argued that this new deduction (codified at 26 U.S.C. § 199A) could lead to a widespread shift toward independent contractor jobs as workers seek to reduce taxes paid. This shift could cause workers to lose important employee protections and leave them more economically vulnerable.

This Article examines whether this new tax provision will create a large-scale workplace shift and, if …

Legislation And Comment: The Making Of The § 199a Regulations, Shu-Yi Oei, Leigh Osofsky

Faculty Scholarship

In 2017, Congress passed major tax legislation at warp speed. After enactment, it fell to the Treasury Department to write regulations clarifying and implementing the new law. To assure democratic legitimacy in making regulations, administrative law provides that an agency must issue a notice of proposed rulemaking, followed by an opportunity for the public to comment (so-called “notice and comment”). But, after the 2017 tax overhaul, many sophisticated actors did not wait until the issuance of a notice of proposed rulemaking to comment, instead going to the Treasury Department immediately with comments designed to influence the regulations.

In this Article, …

The Ncaa And The Irs: Life At The Intersection Of College Sports And The Federal Income Tax, Richard L. Schmalbeck, Lawrence A. Zelenak

Faculty Scholarship

Few organizational acronyms are more familiar to Americans than those of the National Collegiate Athletic Association (NCAA) and the Internal Revenue Service (IRS). Although neither organization is particularly popular, both loom large in American life and popular culture. Because there is a tax aspect to just about everything, it should come as no surprise that the domains of the NCAA and the IRS overlap in a number of ways. For many decades, the strong tendency in those areas has been for college athletics to enjoy unreasonably generous tax treatment-sometimes because of the failure of the IRS to enforce the tax …

The Constitutionality Of A National Wealth Tax, Dawn Johnsen, Walter Dellinger

Faculty Scholarship

Economic inequality threatens America’s constitutional democracy. Beyond obvious harms to our nation’s social fabric and people’s lives, soaring economic inequality translates into political inequality and corrodes democratic institutions and values. The coincident, relentless rise of money in politics exacerbates the problem. As elected officials and candidates meet skyrocketing campaign costs by devoting more and more time to political fundraising—and independent expenditures mushroom—Americans lose faith and withdraw from a system widely perceived as beholden to wealthy individuals and corporate interests.

The United States needs innovative approaches to help rebuild foundational, shared understandings of American democracy, the American Dream, and opportunity and …

The Rainy Day Earned Income Tax Credit: A Reform To Boost Financial Security By Helping Low-Wage Workers Build Emergency Savings, Sarah Halpern-Meekin, Sara Sternberg Greene, Ezra Levin, Kathryn Edin

Faculty Scholarship

Financial stability depends on emergency savings. Low-wage workers regularly experience drops in income and unexpected expenses. Households with savings absorb these financial shocks but most low-income Americans lack rainy day savings. Therefore, even a small shock, like car repairs, can result in a cascade of events that throws a low-income family into poverty. Nonetheless, existing policies address emergency savings only indirectly. However, the Earned Income Tax Credit (EITC) already functions as an imperfect, makeshift savings tool. This lump sum refund at tax time gives workers a moment of financial slack, but many EITC recipients lack emergency reserves later in the …

The Offshore Tax Enforcement Dragnet, Shu-Yi Oei

Faculty Scholarship

Taxpayers who hide assets abroad to evade taxes present a serious enforcement challenge for the United States. In response, the United States has developed a family of initiatives that punish and rehabilitate non-compliant taxpayers, raise revenues, and require widespread reporting of offshore financial information by financial institutions and taxpayers. Yet, while these initiatives help catch willful tax cheats, they have also adversely affected immigrants, Americans living abroad, and “accidental Americans.”

This Article critiques the United States’ offshore tax enforcement initiatives, such as the Foreign Account Tax Compliant Act and the Internal Revenue Service’s offshore voluntary disclosure programs. It argues that …

Supply, Demand, And The Taxation Of Knowledge, Shu-Yi Oei

Faculty Scholarship

In The Knowledge Tax, Professor Michael Simkovic tackles the question of why rates of return on higher education are higher than rates of return on other types of investments, such as equity and real estate. Dissatisfied with existing economic explanations, the additional account that he offers is distortionary taxation: specifically, we tax higher education less favorably than other investments, thereby driving down demand for higher education relative to alternatives, creating an undersupply of labor, and buttressing education’s rate of return. In this invited response essay, I explore some of the issues raised but left open by The Knowledge Tax. I …

For Better And Worse: The Differing Income Tax Treatments Of Marriage At Different Income Levels, Lawrence A. Zelenak

Faculty Scholarship

Although both marriage penalties and marriage bonuses exist at all income levels under the federal income tax, the system is tilted toward penalties for lower-income couples, toward bonuses for middle-income couples, and back toward penalties for upper income couples. This Article begins by explaining how the tax rules produce these differing treatments of marriage at different points in the income distribution. It then argues that the increase in recent decades in the social acceptability and prevalence of cohabitation makes tax marriage effects a more serious concern--in terms of both behavioral, effects and fairness-than in earlier decades. After demonstrating that Congress …

The Almost-Restatement Of Income Tax Of 1954: When Tax Giants Roamed The Earth, Lawrence A. Zelenak

Faculty Scholarship

No abstract provided.

Tearing Out The Income Tax By The (Grass)Roots, Lawrence A. Zelenak

Faculty Scholarship

No abstract provided.

Ending The Sweetheart Deal Between Big-Time College Sports And The Tax System, Richard L. Schmalbeck

Faculty Scholarship

This paper was prepared for the annual conference of the National Center for Philanthropy and Law, held at the NYU Law School, held October 24-25, 2013. The overall topic was “Tax Issues Affecting Colleges and Universities,” and I was asked to address specifically those issues relating to athletics. This paper considers two specific issues that have in common only that they involve college sports, and are plagued by egregiously bad, (in this case, egregiously generous), tax treatment: the failure of the IRS to regard any part of the revenue from college sports as unrelated business income, and the choice by …

Mitt Romney, The 47% Percent, And The Future Of The Mass Income Tax, Lawrence A. Zelenak

Faculty Scholarship

No abstract provided.

The Uneasy Case Against Tax Lien Subordination, Shu-Yi Oei

Faculty Scholarship

I.R.C. § 6323, which governs how the federal tax lien ranks against the interests of the taxpayer’s other creditors, subordinates the tax lien to the claims of other creditors in various ways. Tax lien subordination is commonly justified on the grounds that it enhances taxpayer asset value, facilitates commercial transactions, and reduces monitoring costs for private creditors. This short essay argues, however, that these benefits may be illusory. Tax lien subordination may, in fact, create costs and distortions and may lead to unfair distributive results. This essay suggests that the tax lien priority scheme might be made less costly by …

Will The Federal Income Tax Have A Bicentennial?, Lawrence A. Zelenak

Faculty Scholarship

No abstract provided.

The Broken Safety Net: A Study Of Earned Income Tax Credit Recipients And A Proposal For Repair, Sara Sternberg Greene

Faculty Scholarship

The Earned Income Tax Credit (EITC) is the largest federal antipoverty program in the United States and garners almost universal bipartisan support from politicians, legal scholars, and other commentators. However, assessments of the EITC missed an imperative perspective: that of EITC recipients themselves. Past work relies on largely unconfirmed assumptions about the behaviors and needs of low-income families. This Article provides a novel assessment of the EITC based on original data obtained directly from 194 EITC recipients through in-depth qualitative interviews. The findings are troubling: They show that while the EITC has important advantages over welfare, which it has largely …

Who Wins When Uncle Sam Loses? Social Insurance And The Forgiveness Of Tax Debts, Shu-Yi Oei

Faculty Scholarship

Small-scale tax collections decisions have large-scale distributive consequences. The central question addressed in this Article is whether a deliberate government decision to forgive or to not collect a tax owed can be justified, given the distributive consequences that may result. In brief, the government’s decision not to pursue full collection of a delinquent tax debt may give rise to two types of distributive outcomes: First, the benefits of non-collection may be captured by the forgiven taxpayer’s other creditors. Second, the costs of non-collection may be imposed upon compliant taxpayers and the public through higher taxes, decreased government provision of goods, …

The Great American Tax Novel, Lawrence A. Zelenak

Faculty Scholarship

Reviewing, David Foster Wallace. The Pale King (Michael Pietsch ed., 2011)

The Loophole That Would Not Die: A Case Study In The Difficulty Of Greening The Internal Revenue Code, Lawrence A. Zelenak

Faculty Scholarship

Congress and the Treasury have commissioned the National Academy of Sciences (NAS) “to undertake a comprehensive review of the Internal Revenue Code of 1986 to identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.” The hope of the proponents of the NAS carbon audit is that Congress, once informed of the results of the audit, will respond by “greening” the Internal Revenue Code. This Essay cautions that a more environmentally friendly Code will not necessarily follow from the legislative consciousness-raising of …

Complex Tax Legislation In The Turbotax Era, Lawrence A. Zelenak

Faculty Scholarship

When tax returns were prepared with pencil and paper—in an era now gone forever—Congress did not impose income tax provisions of great computational complexity on large numbers of taxpayers, in the belief that it was unreasonable to require average taxpayers (or their paid preparers) to struggle with computationally complex provisions. As return preparation software gradually replaced the pencil in recent decades, the complexity constraint weakened and eventually disappeared. Congress has responded by imposing unprecedented computational complexity on large numbers of taxpayers—primarily through the expanded scope of the alternative minimum tax and the proliferation of phase outs of credits, deductions, and …

Debt-Financed Consumption And A Hybrid Income-Consumption Tax, Lawrence A. Zelenak

Faculty Scholarship

The debate between proponents of income taxation and proponents of consumption taxation has focused almost exclusively on the differing treatment of savings under the two tax bases. This is odd, given that income and consumption tax bases also differ in their treatment of debt-financed consumption. This Essay addresses the largely-ignored question of the taxation of debt-financed consumption. It contends that a strong case can be made in favor of a hybrid income-consumption tax base under which taxation is triggered by the earlier of consumption or income, so that both debt-financed consumption and saved income are included in the tax base. …

Of Punitive Damages, Tax Deductions, And Tax-Aware Juries: A Response To Polsky And Markel, Lawrence A. Zelenak

Faculty Scholarship

In “Taxing Punitive Damages,” Gregg D. Polsky and Dan Markel argue that defendants paying punitive damages are under-punished relative to juries’ intentions, because tax-unaware juries do not take into account the fact that the deductibility of punitive damages significantly reduces defendants’ after-tax costs. They note that the Obama administration has proposed addressing the under-punishment problem by amending the Internal Revenue Code to disallow deductions for punitive damages (and for settlements paid on account of punitive damage claims). They conclude, however, that the proposal would be ineffective because defendants could avoid its impact by disguising nondeductible punitive damage settlements as deductible …

Elimination Of The Deduction For Business Entertainment Expenses, Richard L. Schmalbeck, Jay A. Soled

Faculty Scholarship

The proposal is offered as a part of the Shelf Project, a collaboration by tax professionals to develop and perfect proposals to help Congress when it needs to raise revenue. Shelf Project proposals are intended to raise revenue without raising tax rates because the best systems have taxes that are unavoidable to reach the lowest feasible tax rates.

This proposal would deny deductions for all business entertainment expenses. Also, the definition of the term ‘‘entertainment’’ would be narrowed so that expenses that are incurred in a clear business setting and are deeply rooted in producing immediate income or in mining …

Cancellation-Of-Indebtedness Income And Transactional Accounting, Lawrence A. Zelenak

Faculty Scholarship

More than three-quarters of a century after the Supreme Court’s decision in United States v. Kirby Lumber established that the cancellation of a debt produces taxable income, there is still uncertainty - both in the courts and among commentators - concerning the rationale for the taxation of cancellation-of-debt (COD) income. Is the taxation of COD income based on the simple fact that the cancellation of a debt improves the taxpayer’s balance sheet, thus increasing the taxpayer’s net worth in the year of cancellation? Or is it based on a multi-year perspective, in which inclusion of the cancelled debt in income …

Tax Enforcement For Gamers: High Penalties Or Strict Disclosure Rules?, Lawrence A. Zelenak

Faculty Scholarship

This essay responds to Alex Raskolnikov’s proposal to replace the current federal income tax compliance regime with a two-track approach based on taxpayer choice. The “deterrence regime” (DR) would be designed to be chosen by “gamers”, and the “compliance regime” (CR) would be designed to be chosen by all other taxpayers. Penalty rates would be significantly higher in the DR than in the CR. In this response, Lawrence Zelenak notes that the tax shelter disclosure rules of current law can also be viewed as a way of imposing a special compliance regime-featuring high odds of detection rather than high penalty …

Tax Policy And Personal Identity Over Time, Lawrence A. Zelenak

Faculty Scholarship

Tax policy analysts often claim that tax distributional analysis should be based on a lifetime perspective, at least as a theoretical ideal. A prominent argument in favor of a consumption tax base over an income tax base appeals to this lifetime equity perspective, as does the argument for lifetime income averaging under an income tax with progressive marginal rates. These appeals to lifetime equity assume, in most cases without discussion, that personal identity over time is an unproblematic concept, so that the whole-life person is clearly the ideal unit for purposes of distributional analysis. However, the philosopher Derek Parfit claims …

A Structural Critique Of Trader Taxation, Shu-Yi Oei

Faculty Scholarship

This article scrutinizes the structural elements underlying the unusual tax treatment of securities traders under current law. After summarizing the distinguishing features of trader taxation, this article explains how the treatment of securities traders today has occurred due to a long-standing, legislatively created disjuncture at the point where the “to customers” requirement in the capital asset rules (i.e., the requirement that traders must sell “to customers” in order to escape capital asset classification and court findings that they do not) and the “trade or business” concept intersect. The article reviews some of the traditional critiques that have been levied against …

The Theory And Practice Of Tax Reform, Lawrence A. Zelenak

Faculty Scholarship

Reviewing, President's Advisory Panel on Federal Tax Reform, Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System (2005).By The President’s Advisory Panel on Federal Tax Reform. 2005. Available at: http://www.taxreformpanel.gov/final-report/

Justice Holmes, Ralph Kramden, And The Civic Virtues Of A Tax Return Filing Requirement, Lawrence A. Zelenak

Faculty Scholarship

A major goal of some tax reform proponents is the elimination of the return filing requirement for many or all Americans. Although the President's Advisory Panel on Federal Tax Reform heard several hours of testimony concerning the possibility of a "return-free" income tax system, the Report of the Panel failed even to discuss the issue. This Article contends that the Panel was right to recommend (by implication) the retention of a return-based tax system, given the Panel's recommendations for major tax simplification. As long as the return filing obligation is not unduly burdensome which it would not be under the …