Since 2008, excise taxes on gasoline, diesel, and other motor fuels—motor fuels taxes (“MFTs”)—have failed to raise enough revenue to support the construction, maintenance, and repair of U.S. highways, bridges, and roads. This shortfall has been caused by a combination of stagnating MFT rates, inflation, increasing fuel efficiency in the nation’s automobiles, and, to a far lesser degree, increased usage of hybrid and electric vehicles (“EVs”), which use little or no motor fuel. Governments and legal scholars have introduced three proposals to remedy the shortfalls in MFTs that focus on requiring owners of EVs and hybrids to pay additional fees and taxes. This Article evaluates these three proposals and demonstrates that they are ineffective, impractical, and disincentivize drivers from purchasing electric and hybrid vehicles without raising enough revenue to justify this interference. When appropriate, the Article offers solutions to improve the proposals. Finally, it discusses two proposals to address the shortfall in MFT revenue as effective solutions that do not disincentivize EV and hybrid adoption: raising MFT rates and funding roadwork through general revenue.
This Article takes a fresh look at the problem of taxpayer heterogeneity—how the same good or service can have very different value depending on who receives it. This issue is well known in the fringe benefits context. Every tax student wrestles with Benaglia, trying to figure out how much income someone receives from free room and board. But the problem goes far beyond fringe benefits. It also shows up when a parent loans money to a child, when luxury brands offer employee discounts, or when tech workers receive stock options. These examples come from separate corners of the tax literature, but they all point to the same underlying issue: income is hard to measure when value varies by taxpayer. Taxpayers vary not just in their consumption preferences, but also in their creditworthiness, likelihood to switch jobs, and other characteristics that affect the accurate measurement of income. This Article makes two main contributions. First, it identifies taxpayer heterogeneity as a cross-cutting problem that links many of tax law’s toughest income measurement questions. Although each area has been studied separately, prior scholarship hasn’t connected them through the common thread of heterogeneity. Recognizing that connection opens the door to broader insights and more unified solutions. Second, the Article explores a practical and intuitive way to deal with this problem: focusing on setting floor valuation using minimum benefits. Many goods or services provide at least a baseline value to any taxpayer. The tax code already hints at this approach in a few places but fails to make the floor explicit. This Article shows how building minimum benefit “floors” into the law can improve both the accuracy and the fairness of the income tax—while also making the rules simpler to administer.
This Note examines the constitutional concerns raised by a proposed consent decree in recent litigation challenging the Johnson Amendment, which bans electoral intervention by 501(c)(3) organizations. It argues that the Amendment’s justification as a conditional government subsidy mischaracterizes case law and the tax code, and that the Amendment is not narrowly tailored to survive strict scrutiny. It then argues that the consent decree proposed by the IRS and plaintiff organizations, which creates a carve-out exempting only religiously motivated speech from a religious leader to their congregation, violates the Establishment Clause and the Free Speech Clause of the Constitution by privileging religious viewpoints. The decree also fails to address the Johnson Amendment’s defects: it preserves vagueness and risks distorting the political landscape by channeling electoral advocacy into entities that are already exempt from disclosure requirements applicable to other 501(c)(3)s, while continuing to silence secular nonprofits that must comply with such requirements. Finally, this Note proposes a neutral, activity-based legislative alternative that would protect free speech for all 501(c)(3) organizations while safeguarding against large-scale, tax-favored electoral campaigning through targeted taxation and disclosure requirements.
This Article points out the legal and ethical exposure American workers’ and retirees’ preparation of tax withholding forms presents when they seek to take advantage of a tax payment deferral technique the forms so readily offer. It details three withholding settings and how each presents potential legal risk for the worker or retiree. Two of the settings exploit a frequently touted safe harbor that allows withholding to occur very late in the year to eliminate penalties that normally apply for not having paid the taxes earlier in the year. This safe harbor presents a multi-billion-dollar time-value-of-money loss to the government. Besides legal risk for Americans who inaccurately complete the forms, this Article argues that the tax ethics and nascent tax-related Environmental, Social, and Governance (“ESG”) literature has not yet judged the behavior of those who delay a tax payment (even when done in full legal compliance), as opposed to those who engage in tax avoidance or evasion. It also argues that the government’s approach to withholding and its inconsistent and confusing forms are tantamount to the government becoming complicit in Americans’ deficient submissions. In some cases, the government is laying a perjury trap, especially for Americans in financial straits looking to their withholding form as a lifeline. The 2022 increase in the information that retirees must provide on their forms, now matching the details employees have always provided, expands prosecutorial reach to retirees. This Article offers numerous recommendations to improve the withholding process and forms to reduce the temptation to engage in the criticized behavior.
Tax policy offers a core tool for mitigating the sweeping public policy challenges of generative artificial intelligence (“AI”). Specifically, we propose a tax that would allow the public to own a share of AI itself, not just through future income tax liabilities or new excise taxes, but a proposed ownership structure that requires a one-time tax payment by generative AI firms in the form of equity. Fractional public ownership of AI would directly address four of the key harms of AI that have been well-documented in a deep and still expanding literature. First, many types of AI were built through the unauthorized use of millions of copyrighted works, allegedly amounting to copyright infringement on an unprecedented scale. Sharing ownership of AI would compensate injured creators alongside the broader public whose data was nonconsensually harvested. Second, AI is expected to pose massive labor market disruptions, but shared ownership would allow displaced workers to benefit from the profits of the technology substituting for their labor. Third, greater public voice in the corporate governance of AI could lead to greater scrutiny and bolder interventions in the ways AI has been shown to reproduce and compound many existing forms of discrimination. Finally, sharing the ownership of AI through government’s principal tool for redistribution, taxation, directly addresses the rapid wealth concentration and monopolization already underway with AI developers. This proposal can also work in tandem with targeted regulation of AI and private law remedies addressing AI’s many harms. Ultimately, the original contribution of this Article is to propose a unique in-kind tax payment structure that would require firms with ownership of AI to remit equity shares to the public. The Article describes multiple structures for this arrangement, drawing from existing models of fractional ownership used in private investment to serve as a paradigm for a partial public interest in AI. In total, this Article argues that many of the greatest concerns related to AI can be solved through sharing AI. And tax policy is the best tool to achieve this goal.
Cross-border combinations of U.S. and foreign public companies are unusual but happen from time to time. Our broad and often arbitrary anti-inversion rules discourage such transactions utilizing a foreign parent company for the combined group. But using a U.S. parent company can also be painful to the foreign company shareholders. Our section 367(b) regulations require gain recognition for the foreign company’s material shareholders subject to U.S. tax. That seems to be a high price to pay for the pleasure of bringing the foreign corporate group into the U.S. tax net. Much has been discussed and written about the section 367(b) regulations that compel this result since the regulation’s finalization in 2000 and especially since the enactment of the 2017 Tax Cuts and Jobs Act. This article reflects our exploration into what led the original regulation writers down the path they took and suggests that maybe they were wrong in their thinking. Our hope is that it will stimulate a broader discussion of the goals of the section 367(b) regulations as applied to inbound transactions and how they should be implemented in the current regime of section 245A deductions and GILTI and Subpart F inclusions.
The tax revenue gap—the difference between how much the IRS collects in tax revenue and how much it should collect based on the text of the Internal Revenue Code—is both well-defined and well-studied. But raising revenue is just one purpose of taxation; the tax code also operates to redistribute wealth. Drawing from the tax revenue gap and redistribution literatures, this article coins a parallel concept, the tax redistribution gap, to map the extent to which the tax system falls short of its redistributive goals. Introducing a tax redistribution gap measure challenges background assumptions in current tax discourse: first, it would call out a reliance on pre-market income as a distributive baseline, which serves to overstate the redistributive impact of the tax code; second, it would increase the profile of redistribution among policymakers and the public—understandably, measures like the tax revenue gap and tax expenditure budgets focus dialogue on tax evasion and over-spending by the government. Ultimately, the tax redistribution gap would provide a single measure that displays how we are falling short of a key task of the state (redistribution). And by understanding and comparing the component ways our current tax systems falls short of it intended outcomes, we can better tailor redistributive policy solutions.
Since the dawn of income taxation in America, the tax treatment of alimony payments has flipped, flopped, and flipped again. The tax burden was first borne by the person paying alimony, then by the person receiving it. The burden has since shifted back to the alimony payor. This, we argue, was a flop. The Tax Cuts and Jobs Act of 2017 eliminated a tax deduction for alimony payments that served to reduce the taxable income of the payor and shift the payments into the taxable income of the recipient. Congress justified this deviation from the longstanding deduction/income treatment based an old Supreme Court case that held alimony was to be taxed to husbands as part of their moral and legal obligations to support their wives. More likely, Congress was acting for its own benefit—eliminating the deduction is estimated to raise billions for the fisc. In this Article, we argue that this change was a mistake. Treating alimony payments as income to the recipient better comports with the Tax Code’s progressive rate structure and the concept of taxing a party based on “ability to pay.” The argument proceeds in two parts. First, we argue that alimony payments do not constitute consumption by the payor. Thus, like gifts, alimony payments should only be taxed to one of the parties involved in the transfer. Existing scholarship seems to coalesce on this point. Still, this does not tell us whom to tax: the alimony payor or the recipient? Distinguishing the income tax treatment of alimony from that of gifts, we argue the latter. As a theoretical matter, allowing a deduction for alimony payments aligns with our progressive rate structure by accounting for the payor’s lower marginal “ability to pay” after making alimony payments. These payments represent future consumption by the recipient, not the payor, and thus reflect an increase in the recipient’s “ability to pay” taxes on such sums. And, as a practical matter, allowing parties the flexibility to allocate the tax burden among themselves is a negotiating chip that may grease the wheels in other areas of the divorce settlement process. We recommend that Congress flip once more and return the tax treatment of alimony to what it was prior to the 2017 Act reform.
School choice is on the rise, and states use various mechanisms to implement it. One prevalent mechanism is also a uniquely problematic one: the tax credit. Tax credits are deficient at equitably distributing a benefit like school choice; they are costly, and they invite fraud. Instead of using tax credits, states opting for school choice programs should use direct funding. Direct funding will more efficiently achieve the goals of school choice because it can be regulated like any other government benefit, even if it ends up subsidizing religious private schools. Tax credits’ prevalence is not inexplicable, of course. It is based on a prior legal understanding that states were constitutionally restricted from directly funding religious schools. Historically, states that wanted to include religious private schools in their school choice programs therefore felt pushed to use tax credits as their only constitutionally viable option. However, the landscape has changed. The Supreme Court held in 2022 that direct funding of religious private schools is not only constitutionally permissible, but it is required if a state funds non-religious private schools and provides no neutral basis for excluding religious ones. The initial reason for tax credits’ popularity therefore no longer exists; both tax credits and direct funding alike are constitutionally acceptable. It is time, therefore, to revisit the merits of tax credits and ask whether, knowing what we know now, it is worth disposing of them in favor of direct funding. This Article answers that question with a resounding yes. Tax credits carry significant disadvantages—specifically, inequitable distribution and difficulties in regulation—that direct funding does not. Now that the law is clear, states choosing to sponsor school choice should discontinue their use of tax credits in favor of direct funding.
Legal and economic scholars have examined the intersection between corporate governance and taxation; however, recent legal scholarship has generally focused on the interplay between director compensation, management measures in the face of the market for corporate control, and the double taxation of inter-corporate dividends. Other aspects of the relationship between corporate governance and taxation have received limited attention. This article aims to fill this gap in the literature. First, this paper discusses the corporate agency problem and the existing justifications for the corporate tax. Second, this paper argues that the corporate tax can be justified on the ground that it mitigates the corporate agency problem more effectively and with fewer adverse consequences than alternative taxation systems.
Critics are increasingly calling for Congress to remove charity regulation from the IRS. The critics are wrong. Congress should maintain charity regulation in the IRS. What is at stake is balancing power between the state, charity as civil society, and the economic order. In a well-balanced democracy, civil society maintains its independence from the state and the economic order. Removing charitable jurisdiction from the IRS would blind the IRS to dollars placed in the charitable sector increasing tax and political shelters and wealthy dominance of charities as civil society. A new agency without understanding of, or jurisdiction over, tax cannot act as the bulwark as can the IRS. The critics are right that both the states and the IRS are failing at charitable regulation. Ideally, Congress would allocate sufficient resources to the IRS. However, the long history of charity regulation shows that they are unwilling to allocate the resources to this endeavor. This, in fact, is a flaw of the proposals for a quasi-federal charitable regulatory agency. These proposals will not generate new funds but will instead spread scarce resources even thinner. Instead, Congress should acknowledge its unwillingness to adequately fund charity regulation and shrink the tax-exempt sector by removing the parts that have limited justification for charitable benefits, such as hospitals and private foundations.
The world has seemingly embraced the altruistic idea of ensuring a minimum level of corporate income taxation worldwide, consolidating a “benefits for all” narrative by which both developed and developing countries apparently gain. However, this altruistic narrative proves to be quite unrealistic for many developing countries. As argued in this article, the perceived benefits of a global minimum corporate income tax in developing countries rest exclusively upon three unconvincing premises. These include the assumption that all corporate income tax incentives provided by developing countries are equally inefficient, the idea that all developing countries can seamlessly transition from corporate income tax competition to alternative forms of tax and non-tax competition, and most notably, the notion that supporting or opposing a global minimum corporate income tax could either boost or diminish tax revenue for developing countries. This article urges a departure from these premises and elaborates upon three strategic recommendations for developing countries, which include: first, viewing a global minimum corporate income tax as a concept divorced from the assumption of revenue gain or loss; second, using the global minimum corporate income tax as an opportunity to reassess their tax and non-tax incentives, encompassing alternative competitive strategies; and third, striving for simplicity and ease of administration in designing and implementing a minimum tax approach. In doing so, developing countries could perhaps find an opportunity to refine their general action plan to attract foreign direct investment (FDI) more effectively while they still try to ride the wave of minimum global corporate income taxation that the world seems to be in.
Since 2008, crowdfunding websites such as GoFundMe have raised billions of dollars on behalf of hundreds of thousands of individuals with medical needs. Scholarly and popular press accounts explore issues surrounding access, bias, and the distribution of medical crowdfunding’s benefits, but virtually no attention has been paid to these types of systemic considerations in the context of taxation. The Internal Revenue Code, however, provides myriad exemptions and benefits associated with health care, and the tax treatment of medical crowdfunding has important implications for the coherence of the United States’ patchwork system for healthcare provisioning. This Article situates the tax consequences of medical crowdfunding in this larger context, then uses this context to address the normative question of how medical crowdfunding should be treated. Although limited formal or informal guidance addresses the taxation of crowdfunding outside of the business context, most contributions through medical crowdfunding websites constitute gifts under current tax law—nondeductible to the donor and not includible by the beneficiary. This intuitive treatment, however, presents severe doctrinal, interpretive, and compliance issues for those most likely to rely on medical crowdfunding. This analysis is complicated further by collateral tax effects, such as the availability of secondary tax benefits, namely the itemized deductions for extraordinary medical expenses and charitable contributions, and requirements for information reporting. Normatively, the tax treatment of medical crowdfunding is clouded by unresolved (or unresolvable) debates about the appropriate treatment of both gifts and medical expenses under an ideal income tax base. This Article asks instead how medical crowdfunding best fits within the current regime of tax benefits for medical care, such as those for employer-provided health insurance. This approach, which derives from the theory of the second-best, takes the current tax policy landscape as fixed, then asks how medical crowdfunding should be taxed. This Article recommends distinguishing, on a quantitative basis, between regular and windfall receipts from medical crowdfunding campaigns, as well as an expanded medical expense deduction to place crowdfunding recipients in parity with the beneficiaries of other forms of healthcare provisioning.
Similar investments are often taxed differently, rendering our system less efficient and fair. In principle, fundamental reforms could solve this problem, but they face familiar obstacles. So instead of major surgery, Congress usually responds with a Band-Aid, denying favorable treatment to some transactions, while preserving it for others. These loophole-plugging rules have become a staple of tax reform in recent years. But unfortunately, they often are ineffective or even counterproductive. How can Congress do better? As a case study, we analyze Section 1260, which targets a tax-advantaged way to invest in hedge funds. This analysis is especially timely because a multi-billion dollar litigation is pending about this rule. This Article proposes a three-step approach. First, when faced with a new type of tax planning, policymakers should decide whether a response is really necessary. How harmful is the transaction? How feasible is it to target this transaction without also burdening “good” transactions, which don’t involve the same abuse? This first phase determines what we call “the normative presumption” about the transaction. Second, Congress should define which transactions are potentially problematic. An “initial filter” should exempt transactions that clearly don’t pose the relevant concern. Third, once a transaction is deemed to be potentially problematic, a sophisticated test is needed to check whether it actually is. Admittedly, a sophisticated test is costly to administer. This is why initial filters are needed to limit how often it is used. Along with proposing this three-part framework, this Article offers a novel critique of a sophisticated test the government has begun using: a “delta” test, which measures how closely investments track each other. Although delta is often considered the gold standard, we show how easy it is to manipulate. The trick is to add contingencies (e.g., so the investment terminates when the price reaches a specified level). To head off this gaming, we recommend an alternative test that focuses on value instead of on changes in value–and, more generally, on enduring features instead of temporary quirks.
The underlying objective of the Article is to impart an insightful comprehension of mediation and its efficacy as a viable alternative for resolving transnational tax disputes. The Article posits three main arguments. Firstly, mediation, as a method of conflict resolution, offers an array of benefits, and its utilization has witnessed a surge in popularity, particularly with the recent establishment of the Singapore Mediation Convention. Secondly, in the rapidly evolving global landscape, transnational tax disputes have become increasingly intricate and arduous to adjudicate. The current system of dispute resolution, though possessing certain advantages, ultimately falls short in keeping pace with the evolving demands of the industry. The final contention is that mediation can serve as a potent tool to augment the effectiveness of the Mutually Agreed Procedure (MAP) system. In sum, the Article posits that the use of mediation in the context of tax-related disputes embodies the characteristics of soft law, owing to its imaginative and inventive nature. Additionally, as a non-binding mechanism, mediation confers increased flexibility to contending parties, particularly sovereign entities, to safeguard their respective interests. Consequently, mediation can be a valuable adjunct to the MAP system in facilitating the resolution of tax-related conflicts.
Donor-advised funds (DAFs) are conduits for charitable giving that support immediate tax deductions while creating a reservoir of assets for subsequent disposition to end-use charities. The number of new DAF accounts has skyrocketed in the wake of the 2017 Tax Cuts and Jobs Act (TCJA). This Article presents evidence suggesting that bunching charitable contributions to more fully exploit the TCJA-enhanced standard deduction likely motivates much of the onslaught of new DAF accounts established since 2016 and argues that the typical buncher is likely to differ from other DAF account holders in ways that matter from a policy perspective. Thus, while DAF critics have generally focused on the unproductive accumulation of assets in DAF accounts and have advanced reforms aimed at speeding up DAF payouts, this Article argues that in the context of bunchers, unproductive accumulation of assets in DAF accounts is unlikely to be a major problem. The more significant problem with DAF-facilitated bunching is that the cost to the public fisc is unlikely to be justified by incremental charitable giving. Thus, while this Article concludes that regulation targeting DAF payouts is unobjectionable, it argues that a wholly different set of reforms targeting the deductibility of charitable giving generally would be needed to address the cost of DAF-facilitated bunching under current law and under thoughtfully reformed laws involving universal charitable deductions above a floor.
The Panama Papers, the Paradise Papers, and most recently the Pandora Papers have exposed the role of tax advisors, lawyers, financial institutions, and other intermediaries in enabling cross-border tax avoidance and evasion. In response, mandatory disclosure rules (MDRs), which require that intermediaries report their clients’ tax schemes, are becoming prominent tools in the international fight against tax avoidance and evasion. This Article analyzes the development of MDRs over the past four decades as a global phenomenon with three distinct phases beginning in the 1980s. The analysis reveals several trends: expansion in the types of schemes that are reportable, extension of reporting obligations to a great diversity of intermediaries, and increasing multilateralism in the effort to curb intermediary-enabled tax avoidance and evasion. This Article shows how developments in international tax policy have affected, and will likely continue to affect, the expansion and internationalization of MDRs.
In many instances, taxpayers can select among various available tax outcomes by simply filing (or not filing) a tax election. Oftentimes, taxpayers file tax elections on a protective basis. When a taxpayer believes that filing an election may not be necessary but files it just in case, the taxpayer files a “protective tax election.” While existing academic literature explores various aspects of tax elections, the filing of tax elections on a protective basis has not been addressed. This Article begins to fill that gap. In some circumstances, the tax outcome that follows from making a protective tax election is not necessarily what the taxpayer intends to claim. A taxpayer might plan to claim a given tax outcome but be wary of a risk that the claim will fail. The taxpayer files a protective tax election to opt for the taxpayer’s second choice. In other words, the taxpayer uses the election to ensure that, if the taxpayer’s intended claim does fail, the alternative tax treatment imposed upon the taxpayer is more favorable than what would befall the taxpayer in the absence of the protective tax election. This Article adopts the phrase “Favorable Fallback Protective Tax Elections” to refer to protective tax elections filed under these circumstances. The policy implications of Favorable Fallback Protective Tax Elections are numerous. The policy disadvantages of such elections include their potential to trap unwary taxpayers as well as their propensity for encouraging well-advised taxpayers to take more aggressive reporting positions. One policy advantage of such elections is the possibility that they may encourage taxpayers to reveal useful information to the IRS. This Article explores the various uses of protective tax elections, assesses their policy advantages and disadvantages, and recommends ways to amplify their advantages and mitigate their disadvantages.
In this Note, I examine whether the complex nature of the U.S. spin-off rules and the burdens associated with successfully navigating such rules discourage conglomerates from breaking up into smaller companies through tax-free spin-offs. First, I argue that there are numerous disadvantages of conglomeration, which generally tend to outweigh any economic benefits derived from the conglomerate form. Next, I describe the statutory and nonstatutory requirements of tax-free spin-offs, evaluating particularly how each requirement may impact a conglomerate wishing to spin off one or more of its business units. Because conglomerates are usually multinational corporations, I also briefly consider the tax consequences of spinning off a foreign company. In the following section, I discuss the issuance of private letter rulings in connection with conglomerate spin-offs and assess whether the I.R.S.’s recent policy changes have accelerated spin-off activity or, to the contrary, whether they have produced a chilling effect on conglomerate spin-offs. Finally, I examine a recent example of a successful conglomerate spin-off—Liberty’s spin-off of TripAdvisor—before analyzing an example of a failed conglomerate spin-off—Yahoo’s attempt to spin off Alibaba. I conclude that, although tax-free spin-offs are occasionally unsuccessful, such failures are rare. Even if the tax rules are byzantine and the monetary stakes are exceptionally high, conglomerates wishing to spin off business units typically manage to satisfy the requirements. Therefore, although U.S. tax law does not completely hinder deconglomeration, spin-offs are nevertheless costly. Fulfilling the spin-off requirements leads to economic inefficiencies because it entails expensive pre-spin-off restructuring and delays, as well as high transaction and friction costs.
