TaxProf Blog

Lloyd H. Mayer (Notre Dame) has posted Breaching a Leaking Dam?: Corporate Money and Elections, 4 Charleston L. Rev. ___ (2009), on SSRN.  Here is the abstract:

With a brief order issued at the end of its last term, the Supreme Court dramatically raised the stakes in Citizens United v. FEC. What many had predicted would be a case decided on narrow, technical grounds has now become a possible vehicle for overturning two key campaign finance precedents. By ordering re-argument and supplemental briefing on the issue of whether it should overrule either or both Austin v. Michigan Chamber of Commerce and the part of McConnell v. FEC which addresses the facial validity of Section 203 of the Bipartisan Campaign Reform Act of 2002, the Court signaled that it was considering breaching the already leaking dam that keeps corporate (and union) funds at least partially out of federal elections.

The first part of this Article places the Citizens United case in context by reviewing the almost 100 years of gradually tightening federal election laws governing the use of corporate funds, including the Court’s decision in Austin that upheld a state election law ban on corporations making certain election-related expenditures. The second part reviews the specific facts and issues raised in Citizens United. The third part then addresses how the Court is likely to answer the new question it has posed. That part concludes that given the stated and likely positions of the current nine Justices, the argument that is most likely to convince a majority of the Court not to overturn Austin is the doctrine of stare decisis, although that result is far from assured. Even stare decisis is unlikely to preserve the relevant portion of McConnell, however. The fourth and final part addresses the potential ramifications if the Court overrules either or both of the precedents it cited, including the new pressure an overruling of Austin would place on seemingly unrelated federal tax laws governing tax-exempt, nonprofit corporations.

Miki Malul (Ben Gurion University, Department of Publuc Policy and Administration) & Israel Luski (Ben-Gurion University of the Negev, Department of Economics) have posted Optimal Policy of Minimum Wage and Earned Income Tax Credit on SSRN.  Here is the abstract:

The main purpose of this study is to explore the effects of a minimum wage and earned income tax credit on the learning, training, employment, and income of workers with a low cost of investing in training and a long horizon of earnings and those with a high cost of investing and a short horizon of earnings. We present a theoretical framework of the impact of a minimum wage and earned income tax credit on training and employment. The results reveal that the optimal social policy would be to use both a minimum wage and earned income tax credit with a high minimum wage for workers with a low cost of investing in training and a long horizon of earnings and a low minimum wage for workers with a high cost of investing and a short horizon of earnings. The earned income tax credit should only be applied to workers with a high cost of investing and a short horizon of earnings.

David Herzig (Valparaiso) has posted Carried Interests: Can They Effectively Be Taxed, 4 Entrepreneurial Bus. L.J.  ___ (2009), on SSRN.  Here is the abstract:

During the April 2008 Democratic Debate, former Senator Obama with former Senator Clinton almost referred to the subject matter of this article verbatim at page three of the transcript. …  As stated by both candidates, the budget is going to be a major source of contention, and revenue raisers, such as the proposed legislation under § 710, will be a hot button item. It was estimated by a Congressional committee that the fund managers would save $30 billion in taxes over the next ten years if the rules did not change. As promised, on page 122 of President Obama’s 2009 budget is the proposal to tax carried interest as ordinary income. It is suggested that this change will raise $2.7 billion in tax revenue in 2011.

The IPO of Blackstone Group stock caused a public and political backlash when an IPO memorandum showed how much built-up gain existed in Alternative Investment Vehicles (“AIVs”). These offerings spurred public interest in the quantitative net worth of the owners of the funds, like Stephen A. Schwarzman, a co-founder of Blackstone, and the tax rates paid by these owner- individuals. Congress also began to focus on the tax loop-holes allowing these owner-individuals to monetize their carried interest at a significantly reduced tax.

This surge in public interest combined with political needs for offsets to eliminate the alternative minimum tax led several influential lawmakers to seek passage of tax legislation that would reduce the tax incentives currently in place. These tax incentives primarily benefited managers of AIVs. The legislation was introduced most predominately in H.R. 2834, which sought to add § 710 to the Code, changing the treatment of distributions to the service partners from capital gain rates to ordinary income rates. Thus, the bill contains provisions that seek to completely reverse over thirty years of jurisprudence with a shotgun approach in attempting to solve what is deemed an injustice by some.

This article addresses the social equity arguments and the tax and economic theories to solve the perceived problem. Will the managers, if subjected to higher taxes, attempt to maximize the value for the investors? If one believes that there are “enough people who want to be rich,” then there is no reason to further incentivize the fund managers by taxing the fruit of their labor at reduced rates. There will always be ambitious and smart people who would be more than happy to step in and do these services even at higher tax rates. Further, it has been argued that a lower tax rate will not be sufficient to change the behavior of this category of individuals. One would have to demonstrate that fund managers would have to either reduce their current work efforts, if the rates were raised, or that this class of individuals is more sensitive to tax incentives than other professions.

The article then concludes with a thorough discussion of the current law and the proposed changes to solve the social inequity. The article discusses the proposed H.R. 2834 and whether the proposed tax legislation will ultimately be successful in raising revenues as Congress intends. The article concludes with a thorough discussion of the current law and the proposed changes. Under the proposed legislation, the result would be to tax the general partner at ordinary income rates. This would mirror the treatment of nonqualified stock options. The carried interest would still retain the deferral characteristic but would be taxed when they are redeemed by the fund managers at ordinary income rates. However, it is argued that this approach would lead to tax planning such as the utilization of loans.