Michael L. Schler (Cravath, New York), The State of the Federal Income Tax System: Poor, 187 Tax Notes Fed. 1643 (June 2, 2025):
In this report, Schler offers a pessimistic view of the state of the federal income tax system, arising from a confluence of factors related to the courts, Congress, and the executive branch. …
I believe the state of the tax system is poor. But the Constitution requires a State of the Union address to include recommendations that are necessary and expedient.
Unfortunately, most or all of the negative elements of the current tax system will likely continue. Congressional gridlock will persist, tax legislation will have technical errors, Treasury will continue to have the power to fix (at most) only anti-taxpayer errors, no one will have standing to challenge pro-taxpayer regulations, and courts will give only limited deference to Treasury regulations. As a result, litigation will proliferate concerning anti-taxpayer regulations, uncertainty about the tax law will increase, and the law may be different in different parts of the country. The tax system will remain inherently unbalanced in favor of taxpayers, and the ultimate responsibility and power to create as much balance as possible will remain with Treasury, acting within its statutory and constitutional limits.
To relieve some of the initial uncertainties resulting from Loper Bright, perhaps Congress could pass legislation saying that all existing Treasury regulations will be considered valid from their date of publication. It could make specific exceptions and provide any desired rule in lieu of those regulations. There would be no constitutional problem with this because there is no delegation of authority but rather a ratification of specific past actions of Treasury.
The result would be a much more balanced system and would avoid a large amount of litigation likely to arise under Loper Bright. Taxpayers would dislike this approach to the extent that they would prefer that anti-taxpayer regulations be withdrawn or overturned in court, rather than ratified. Taxpayers would like this approach to the extent that they prefer having pro-taxpayer regulations ratified rather than possibly be withdrawn by Treasury or disregarded by a court.
In addition, Treasury could take the position that unless Congress acts to ratify past regulations, it will ruthlessly withdraw on a prospective basis any regulations that it believes do not conform to Loper Bright, regardless of whether they are pro- or anti-taxpayer. Likewise, it could announce that all future regulations would be strictly based on Loper Bright and that any complaints by taxpayers should go to Congress rather than to Treasury. This would be fully consistent with EO 14219 and the rationale of Loper Bright. The burden would then be on Congress to amend the code in any way that it desired to codify any existing regulation so withdrawn by Treasury, to make future technical corrections, and to fill any unintended gaps in the current or future statute.
Congress could also take more modest steps to facilitate the operation of the tax system. It could amend the APA to relieve some of the pressure on Treasury to write expansive preambles for every regulation, to make it easier for Treasury to adopt temporary regs as contemplated by section 7805(b), and to reverse the result in Corner Post (a 6-3 decision) by having the statute of limitations on all challenges to the validity of a tax regulation begin when the regulation is adopted rather than when the taxpayer is injured by it. Congress could clarify that the ESD is relevant whenever the tax result of a transaction is inconsistent with congressional intent. It could increase funding for the IRS to allow fair enforcement of the tax laws at all income levels.
As to delegations, Congress could enact the Chevron standard into law, at least for tax regulations, because Loper Bright was an APA case rather than a constitutional case. On the other hand, even Chevron deference might now be subject to challenge as an unconstitutional delegation. In any event, at a minimum, all new tax laws should have delegations that are tailored to any new standard for constitutional delegations, and existing delegations in the code could be modified accordingly. It is good for the tax system that H.R. 1 as passed by the House provides for more specific tax delegations.
Finally, to deal with circuit splits on tax issues, Congress could create a national court of tax appeals, just under the Supreme Court, to take appeals when there is a conflict among circuits.
Aside from more specific tax delegations, do I think any of this is likely to happen, or even reasonably possible? Of course not.
But now the good news: The tax system is just about money. Its problems are fixable, except maybe the lack of taxpayer standing. Congress still has the power to raise taxes, close loopholes, adopt antiabuse rules, and increase the funding of the IRS. If revenue collections are inadequate, Congress will be forced to do so to prevent unsustainable debt loads. Taxpayers subject to withholding or that receive information returns will not have much choice but to pay. The others can be encouraged to pay by increased enforcement and penalties, possibly using AI. And Treasury has the power to administer the tax system in a balanced way that is fair to all taxpayers and the fisc.
By contrast, the adverse consequences of environmental degradation, global warming, inadequate medical care, inadequate early childhood education, and the like are not so easily reversed. In my true State of the Union address, I might not even have time to discuss the state of the tax system.
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