UC-Hastings hosts the Spring 2010 Northern California Tax Roundtable today with these papers and commentary:

David S. Gamage (UC-Berkeley), Experimental Evidence of Framing Effects in Work-Leisure Decisions (with Andrew Hayashi (Davis Polk & Wardwell, New York) & Brent K. Nakamura (Ph.D. Student, UC-Berkeley)):

Utilizing an experimental approach, this paper evaluates the impact of different tax-price frames on labor/leisure choices. We devise four framing conditions with identical after-tax compensation schedules, but where the aggregate compensation is decomposed into different combinations of a base wage and a tax or bonus. Our four framing conditions are: (1) base wage only, (2) base wage and flat tax, (3) base wage and progressive tax, and (4) base wage and bonus. This paper’s experiment tests whether these framing conditions affect both the subjects’ willingness to select a work task rather than an alternative “leisure” option, and the amount of work performed by those subjects selecting the work task (the “extensive” and “intensive” margins of labor supply, respectively).

• Commentator: Darien Shanske (UC-Hastings)

Mark Gergen (UC-Berkeley), Appropriate Penalties for Under-paying an Uncertain Tax:

This article considers the appropriate penalty structure when a taxpayer underpays an uncertain tax assuming there is a low probability of the taxpayer’s position being audited by the government. Despite the ubiquity of uncertainty in tax law the question of how legal and factual uncertainty regarding a tax interacts with a low audit rate in affecting taxpayer compliance has received surprisingly little attention. As far as I know, this article is the first to observe that increasing the penalty for under-reporting to compensate for a low audit rate has a perverse effect on tax reporting when the tax due is uncertain. As a result of an asymmetry in the treatment of tax underpayments and overpayments – the former are scaled up by the penalty while the latter, at best, are refunded dollar for dollar with interest – taxpayers have an incentive to underpay by a large margin when the tax due is uncertain. This is true even if the penalty is the inverse of the audit rate. Counterbalancing this effect is the risk that arises from the interaction of a penalty multiplier with uncertainty about the outcome on audit. A penalty multiplier that is a fraction of the inverse of the audit rate can create a striking level of risk if the outcome on audit is genuinely uncertain. Indeed a relatively low penalty multiplier can create significant risk even for a taxpayer who takes a moderate position on an uncertain item because of the risk that the government will take an extreme position.

The problem confronting tax policy-makers is to design a penalty structure that can both deter risk neutral taxpayers from taking aggressive positions when the tax due is uncertain while at the same time not making risk averse taxpayers unduly cautious regarding transactions that have uncertain tax consequences. While I do not solve this problem here I do propose a partial solution and identify an important parameter of a general solution. I argue that the appropriate penalty for under-paying an uncertain tax is fault-based with a penalty that is significantly higher than current penalties but that is in the range of what may be politically feasible. In particular, there is good reason to expect a fault-based mis-valuation penalty in the order of magnitude of 150% of a deficiency will generate sufficient risk to deter many taxpayers from reporting an aggressive value. The efficacy of such a penalty depends on taxpayer risk aversion. The penalty will not deter a risk neutral or risk preferring taxpayer from taking an aggressive position on an uncertain item. But even a penalty that is an inverse of the audit rate will not deter taxpayers who genuinely are risk neutral or risk preferring from taking aggressive positions in the face of uncertainty. For them a solution for aggressive reporting must be found in other levers, such as third-party penalties or enforcement strategies that make taxpayers expect more aggressive positions are likely to be audited.

• Commentator: Heather M. Field (UC-Hastings)

Susan C. Morse (Santa Clara), How to Pass a VAT in the United States: Six Ideas from Australia:

Although no country offers a blueprint for passage of a value-added tax in the U.S., Australia provides an interesting starting point. Australia enacted its GST in 1999 in the regular course of its parliamentary system and without significant external pressure from financial markets, the EU, the World Bank or the IMF. In contrast to the Mulroney government in Canada, John Howard's center-right government in Australia retained control for seven years after successfully pursuing GST enactment. Important factors distinguish the Australian situation from the current U.S. situation, not least the fact that center-right U.S. politicians are hardly ready to lead the charge to enact a VAT. Nevertheless, the Australian story offers at least six interesting ideas for the United States: (1) persuade tax policymakers; (2) persuade business interests with an optimal tax, or competitiveness, analysis; (3) build an interest group coalition parallel to the legislative process; (4) make changes to the personal income tax to address regressivity; (5) consider a side payment to the states; and (6) advertise.

• Commentator: Dennis J. Ventry (UC-Davis)