U.S. Tax Prof presentations at last week's conference on Perspectives On The Development And Enactment Of Tax Policy at the Centre for Tax Law at the University of Cambridge (call for papers):
Victoria Haneman (Georgia; Google Scholar), Temporary Tax Law:
Temporary legislation has been utilized before the founding era of American history, and Thomas Jefferson even went so far as to craft a normative argument in favor of a temporary or intergenerational constitution. Temporariness arguably forces a reexamination of policy and allows for new information to be incorporated into the deliberative process. And though the long-term fiscal implications of tax law depend upon its stickiness and durability, the use of sweeping temporary-effect tax legislation seemed to come into vogue in the United States with the Economic Growth and Tax Relief Reconciliation Act of 2001 (TRA 2001). In fact, the increased use of temporary legislation by the administration of George W. Bush (2001-2009) was the object of scathing critique. The Tax Cuts and Jobs Act of 2017 (TCJA) continued this controversial process of temporary lawmaking, followed by almost eight years of renewal-uncertainty until the reelection of the same U.S. President under which TCJA was initially enacted. This presentation considers the transaction costs of temporary-effect tax provisions in the applied and albeit unique context of TCJA. Although supporters of temporary-effect legislation can argue a broad range of positive political effects, including accountability and fiscal restraint, this presentation considers the idiosyncratic issue bearing upon TCJA’s expiration: temporary legislation increases costs shouldered by future administrations in the sunset year, and no one could have predicted that the yesterday’s administration would also be the future administration contending with those costs. These intertemporal dynamics will drive consequences that remain to be seen, though many lessons will likely emerge as to the use of temporary-effect tax legislation to accomplish sweeping change.
Richard Kaplan (Illinois; Google Scholar), The Fragility of Fundamental Tax Reform: Lessons for Legislators After Forty Years:
In the United States, the last tax reform effort which can legitimately be described as fundamental was enacted almost forty years ago: the Tax Reform Act of 1986. This paper will analyze the legal, economic, and political perspectives which enabled its passage. It will then consider subsequent developments which eroded its most consequential elements, beginning with tax legislation enacted only one year after tax reform became effective. Finally, this paper will deduce lessons for future legislators in terms of what preconditions fundamental tax reform requires.
The first part of this paper will look at the role of committed Presidential leadership, specifically the select-targets approach of President Ronald Reagan and how he defined the basic goals of fundamental tax reform without offering any substantive guidelines. Because fundamental tax reform is primarily a legislative endeavor, this part will examine the reluctant role of the tax-writing committees in the U.S. Congress. Specifically, the House of Representatives’ Ways and Means Committee was controlled by the opposing political party and was chaired by an “old school” wheeler-dealer whose principal objective was not getting blamed for killing President Reagan’s tax reform effort. The Senate Finance Committee was controlled by President Reagan’s political party but was chaired by a Senator who actually announced that he liked the pre-reform tax law “as it is.” The legal constraints surrounding revenue neutrality will then be analyzed in this context.
Although this legislation was widely praised by tax academics, the taxpaying public was less impressed. They focused instead on the myriad changes to longstanding tax rules which upended much of their pre-reform tax planning, and the foundational tradeoff of fewer deductions for dramatically lower rates did not resonate with them. As a result, the legislation lasted barely a year before some of its critical compromises began to unravel. When President Reagan’s vice-president, George H.W. Bush, was elected president only two years later, he actually campaigned on reversing one of the most significant pillars of the 1986 Tax Reform Act – namely, eliminating the preferential treatment of capital gains. That reversal opened the proverbial floodgates for further changes which erased much of the Tax Reform Act’s inherent logic.
Going forward, legislators must recognize, as President George W. Bush and President Trump did, that what most Americans want is not simpler taxes but lower taxes. Furthermore, the appetite for fundamental tax reform must grapple with the new reality that simplifying tax return preparation is less compelling when 91 percent of taxpayers file their returns online. Moreover, the flow of information currently is far more diverse and uncontrolled than when fundamental tax reform was last accomplished; news coverage is now ubiquitous, available around-the-clock, amplified via artificial intelligence, and contorted through social media. This paper will examine this extremely critical and unappreciated aspect of the tax reform process, as well as the increasing distrust of expertise generally following the Covid-19 pandemic.
Henry Ordower (St Louis; Google Scholar), Indirect Legal Intervention in Tax Policy Formulation:
This project will focus on the indirect participation of lawyers in tax policy making and implementation. The project will argue that intervention by lawyers in the revision, formulation, and implementation of tax policy through tax planning and controversy supplements and even supersedes lawyers’ more direct and formal intervention in tax policy through their work in government and other policy making bodies, lobbying for or against tax proposals at the behest of their private clients and the technical drafting of tax legislation. Much tax planning is a legal function insofar as it also requires the preparation of legal documents to implement a plan, while tax controversy generally anticipates litigation requiring the involvement of legal professionals who may represent taxpayers in court.
Favorable outcomes for clients sometimes undermine tax policy decisions and necessitate revision of even fundamental tax policy. The limited resources available to taxing agencies undercut their ability to implement tax policy decisions. Resource scarcity compels tax agencies to compromise full execution of even clear statutory authority. Historical examples are ubiquitous. On a broad scale, tax planning has rendered collection of taxes from heavily resourced taxpayers who may engage skillful tax planners increasingly difficult. Tax planning has contributed to the shift in tax policy from progressive taxes focused on affluent taxpayers to regressive, but difficult to circumvent, taxes on less affluent taxpayers. Governments in the latter half of the 20th century substituted regressive value-added taxes for the steeply progressive income and estate taxes that characterized the mid-20th century.
In income taxation, tax planning has driven the trend in policy making with its implementing taxing legislation toward a strict and detailed rules that seek to provide predictable and certain tax outcomes. Such rules reflecting the drafting style characteristic of heavily legalistic, contractual negotiation and the accompanying abandonment of historical standards-based legislation invite tax planners to seek tax structures that the specific rules fail to address and exploit the identified gaps to the advantage of their clients. Courts have tended to reject arguments of statutory intent where the statute is detailed, and the legislator has not addressed the taxpayer-favorable structure. To the courts – if the legislature wished to apply the statute to a specific structure, it knew how to draft the necessary legislation.
Efforts to return to standards and principles-based interpretation of tax law have relied predominantly on the proliferation of general anti-avoidance rules, but GAARs have found only very limited acceptance in litigation and that primarily when the tax plan has been outrageous. The Cum/Ex transactions are an example of outrageous structuring to capture duplicative tax benefits, but the German decisions involving Cum/Ex have relied only secondarily on the German GAAR.
The project will identify examples of these trends in the role of the lawyer in tax policy formulation and implementation and review instances in which governmental bodies have sought to limit the trend by regulating the lawyers and other tax planning enablers. The recent EC Safe proposal is one example.
The Article explores three strategies used in the legal design of the relevant reforms. The first strategy involves establishing a legal standard that the U.S. administration can implement within the existing legal framework, thereby eliminating the need for Congressional action. The second strategy focuses on minimizing the negative consequences of U.S. non-participation by ensuring that Congressional inaction cannot prevent the international rollout of the legal standard or undermine its effectiveness. The third strategy aims to create incentives for the U.S. government and relevant stakeholders to adopt the reform.
The Article evaluates these strategies and their effects, including their impact on the negotiation, adoption, and implementation of international reforms. It also discusses concerns related to extraterritoriality, treaty violations, legitimacy, and retaliatory actions.
Blaine Saito (Ohio State; Google Scholar), Tax Policy in the U.S. Administrative State:
In the US federal government, the most salient tax policy decisions happen in Congress. But important policy decisions happen through regulations and other guidance that Treasury and the IRS promulgate. The agencies have experts in law and other aspects of taxation. The traditional view was that these agency experts would develop rules that filled gaps or made decisions when Congress delegated such matters to the agencies. The development of regulations and guidance would thus be guided more by experts and less by politics and outside influence.
But the story is complicated. Tax policy and law is also subject to the same strictures of any other administrative agency. That means that for binding law through regulations to get developed, the agencies must go through the standard process of notice and comment informal rulemaking. Notice and comment, while salutary on democratic grounds, opens the agency up to capture. Even without the unification with Administrative Law, though, capture through powerful can still exist through backchannels and cultural means. And capture is particularly problematic when the profession itself outside of the government tends to have interests of clients who seek to avoid taxation as their goal, calling into question even the ideas of the bar association comment into some question, especially in the age of commodified legal and tax advice.
Sealing off tax experts within government from the rest of the world is not the solution. It is not desirable, because it would remove them away from important information that does arise. It also undermines some of the concerns of democratic legitimacy of the administrative state. It would reduce the overall public saliency of the work. It also does not solve the problems. Many of the cultural-professional overlaps will remain. Additionally, the backchannels that many businesses already have also cannot get away, and thus their voices will still likely exert greater influences.
Instead, considering the new Administrative Law regime post Loper Bright, tax policy could take a view that marries expertise better with the ideals of democratic governance in the U.S. First, because delegation issues are more important, Congress can and should be more explicit as to what matters are delegated to agency authority. In writing statutes, it should at least give some levels of values and guiding principles for the agency to follow when promulgating detailed implementing regulations or other guidance. The agencies should also do more to engage with a broader array of voices at various stages of the process. They should find and engage a broader set of voices more proactively and use their expertise to encourage dialogue and a revival of administrative procedures.
The Article explores three strategies used in the legal design of the relevant reforms. The first strategy involves establishing a legal standard that the U.S. administration can implement within the existing legal framework, thereby eliminating the need for Congressional action. The second strategy focuses on minimizing the negative consequences of U.S. non-participation by ensuring that Congressional inaction cannot prevent the international rollout of the legal standard or undermine its effectiveness. The third strategy aims to create incentives for the U.S. government and relevant stakeholders to adopt the reform.
The Article evaluates these strategies and their effects, including their impact on the negotiation, adoption, and implementation of international reforms. It also discusses concerns related to extraterritoriality, treaty violations, legitimacy, and retaliatory actions.
Ziyi Wang (Cornell), The Legal and Economic Challenges of Implementing Planned Tax Reforms:
This paper explores the persistent challenges in implementing planned tax reforms. It examines the interplay between law and economics in translating comprehensive theoretical models into actionable policies. The study analyzes structural barriers, such as political resistance, administrative complexities, and legal inertia, that impede the adoption of reforms. Using case studies of successful and unsuccessful reforms across jurisdictions—including the Mirrlees Review, Tax Reform Act of 1986 in the United States, the GST reforms in India, and the introduction of the VAT in the European Union—the paper evaluates the effectiveness and durability of enacted changes.
Special attention is given to the Mirrlees Review as a benchmark for holistic tax reform, analyzing why its recommendations have struggled to move beyond the theoretical domain. By contrasting this with the successful implementation of New Zealand’s tax reforms in the 1980s, the paper identifies key enablers, such as political will, public buy-in, and institutional alignment, that contribute to the feasibility of reforms. It also investigates examples of partial implementations, such as the UK’s adjustments to business rates, and their implications for reform credibility and public trust.
The paper proposes innovative legal structures and procedural safeguards to enhance the feasibility and resilience of fundamental tax reforms. These include establishing independent tax reform commissions, incorporating sunset clauses to ensure periodic review, and mandating pre-legislative impact assessments. By addressing the dichotomy between theoretical models and practical implementation, this research aims to provide actionable insights for policymakers seeking to navigate the complex terrain of tax reform.
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