a surfer in front of the malibu pier on a sunny day

Paul L. Caron
Dean
Pepperdine Caruso
School of Law

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  • What Tax Profs Are Reading . . . Maule on Harvard to Hiroshima

    Thursday, May 20, 2004

    This is the third installment of What Tax Profs Are Reading. The goal is to share with the broader tax community reviews of both tax-related and nontax-related books recently read by tax professors. We invite tax professors to submit book reviews for publication on TaxProf Blog.

    Book cover photoJim Maule (Villanova) shares with us his thoughts on James G. Hershberg’s James B. Conant: Harvard to Hiroshima and the Making of the Nuclear Age (Knopf, 1993):

    This 755-page, heavily footnoted (146 pages) biography of a former president of Harvard who played an influential role in the Manhattan Project, and who later served as U.S. High Commissioner of occupied Germany and then Ambassador to West Germany, is both a chronological account of an accomplished chemist and educator who became a government advisor and a diplomat, but also a solid attempt to get into the mind of a bright, curious, and sometimes aloof fellow who found himself deeply involved in some of the significant historical events of the mid-twentieth century. Hershberg has done his research, and takes the reader on a journey through the life of someone who, as is true for most of us, found himself living a life that took turns hardly anticipated in its earlier years.

    Conant’s story has been told many times, in magazine articles, interviews, and several books, including his own memoirs, but none are as extensive as Hershberg’s tome. Though I was alive for some of the events recounted in the book, I was a child with little or no awareness of the complexity of developments that earned at best a sentence in the high school texts from which I learned 20th century history. Considering the many comparisons being made between the current situation in Iraq and the post-war occupation and recovery of Germany and Japan, it was instructive to learn of the many setbacks, diplomatic disagreements, and crises that punctuated that process and to understand that it was not as simple as some are led to believe. Likewise, the details of postwar atomic diplomacy, the dispute about the development of the thermonuclear bomb, and the McCarthy posturings come across in a new, more detailed light, in the context of Conant’s involvement but benefitting from the perspective gained by the passage of 50 years.

    After stepping down as Ambassador to Bonn, Conant obtained a Carnegie Foundation grant which he used to study and critique American public education. A believer in rewarding merit rather than family ties or legacy connections, he reformed many aspects of Harvard’s education and then picked apart problems in American public education in which were fermenting problems that came to pass as he predicted. He warned of the dangers of ignoring the educational and other social needs of inner city residents, even though his disapproval of civil disobedience left him almost irrelevant as the problems flared into serious civil disturbances. Conant’s ability to maintain the helm of Harvard while providing public service to the nation during war at levels rarely seen in current times was astounding. His early years as Harvard’s president brought him tenure and other controversies, which he weathered as he reformed the faculty hiring process. What is taken for granted as typical, namely, sending an institution’s outstanding graduate students to other universities and inviting back those who prove worthy, became commonplace under his watch. Conant, who started his education as a chemist, married the daughter of his academic mentor, a story within a story that Hershberg gives due respect and consideration. That’s the part that motivates me to read about Conant, for his academic mentor, the Nobel Prize winning chemist Theodore William Richards, was the second cousin of my great grandfather, and Conant’s wife was the third cousin of my grandfather. Though Conant died before I became immersed in my family history researches, I did correspond with his widow for a few years before she passed away. So understand there surely is some “blood is thicker than water” bias affecting my favorable reaction to this book. Even without that relationship, a story of a teacher turned administrator, an administrator turned government consultant, a government consultant turned diplomat, and a diplomat who returns to the study of education should be of great interest to anyone who is curious about the inner workings of academia and its relationship to government during the middle decades of the 20th century.

    For prior TaxProf Book Reviews, see:

    • Paul Caron’s review of Courting the Yankees: Legal Essays on the Bronx Bombers

    • Joel Newman’s review of Perfectly Legal

  • Update on Gov. Schwarzenegger’s Proposed 75% Tax on Punitive Damages

    Thursday, May 20, 2004

    Following up on Saturday’s post: Today’s Wall Street Journal (at A2) has a great piece on California Gov. Schwarzenegger’s Proposed 75% Tax on Punitive Damages. Among the interesting points:

    • Of the eight states (Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah) that currently impose similar taxes, seven let the lawyers eat first (the state takes their share only after attorneys’ fees are paid). California would join Indiana in taking its 75% share before the payment of attorneys’ fees.

    • The article predicts that Gov. Schwarzenegger’s proposal may succeed if the tax is whittled down to 50% and the lawyers are allowed to eat first. The 50% figure is supported by an article by two Vanderbilt economists (Andrew Daughety & Jennifer Reinganum) posted on SSRN, Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases. Here is the abstract:

    We examine the effect of the “split-award” tort reform (wherein the State takes a share of a punitive damages award) on equilibrium settlements and the incentives to go to trial. Using both signaling and screening models of settlement negotiations, we find that the equilibrium settlement is increasing in the likelihood of the defendant being found liable, in the size of both the compensatory and punitive damages, and in the share of the punitive damages award that the plaintiff may keep. We also find that increases in the same attributes (except for the compensatory damages award) increase the likelihood of a case proceeding to trial. Thus, split-award statutes simultaneously lower settlement amounts and the likelihood of trial, as both parties act to cut out the State (since the statutes only apply to awards at trial).

    We then develop an analysis of the revenue that split-award statutes could generate, conditioned on the allocation of a punitive damages award between the plaintiff, his lawyer and the State. We construct a symmetric random proposer model (a composite of the signaling and screening models) and find the revenue-maximizing share for each state currently using a split-award statute with a mandated rate. We find that (for all states but one) the predicted state’s share is approximately 50% (for the remaining state, the revenue-maximizing share should be approximately 66%). These results are robust to variations in economic parameters and to whether the state’s share is gross or net of the plaintiff’s attorney’s fee.

    One surprising result is that these statutes do not deter filings and that their use can actually encourage plaintiffs’ attorneys to accept and pursue weaker cases than would have been brought absent the statute. Finally, we use our results (along with information about the evidentiary standard employed, the allocation scheme used and the presence or absence of caps imposed on damages awards) to infer the likely motivation for passing a split-award statute for six states of interest. We find that policies in Indiana and Oregon are more consistent with a primary motivation of deterrence reduction while policies in Georgia, Iowa, Utah and Missouri seem to be more consistent with a primary motivation of revenue generation.

  • Lawsuit Claims African-Americans Not Subject to Income Tax

    Thursday, May 20, 2004

    William Wright, a Columbus, Georgia lawyer, has filed a tax refund suit in federal district court claiming that the income tax cannot be applied to African-Americans (Attorney Argues Blacks Don’t Owe Income Tax):

    He’s asking Judge Clay Land to declare that the law violates African-Americans’ rights to equal protection and due process, to award him a credit for income taxes he has paid and to order the IRS to leave him alone. Wright wants recovery of about $25,000 he’s paid the IRS through income taxes from 1963-95.

    The tax law passed in 1913 applies to “Citizens and Aliens,” but cannot be applied to African-Americans because they can be considered neither citizen nor alien “by reason of the denial of basic rights of citizenship, and the conditions upon which caused their arrival to the country of the Defendants,” Wright wrote.

    African-Americans are deprived of the basic rights of citizenship based solely on the color of their skin, making them citizens in name only, his complaint states. The “Jim Crow” laws legalizing discrimination, segregation and the grant of citizenship denied African-Americans civil freedom, access to capital, employment, marketplace competition and other advantages of citizenship, the suit says.

    Thanks to reader Ben Cunningham for the tip.

  • NY Times Blasts Tax Components of Budget Resolution

    Thursday, May 20, 2004

    Today’s NY Times has a blistering op-ed (Budget Madness) on the tax components of the budget bill. A sample: “This compromise is a bad election-year joke. Turning large, expensive chunks of the tax code into year-by-year renewals is no way to do tax policy.”

  • Schizer on Loss Sales Rules

    Thursday, May 20, 2004

    David Schizer (Columbia) has posted Scrubbing the Wash Sale Rules on SSRN. Here is part of the abstract:

    ….The wash sale regime of Section 1091 is one of our system’s most important brakes on the timing option. In broad outline, this regime defers a taxpayer’s deduction when she sells a position at a loss and, within a specified period of time, acquires an economically similar position. Yet the wash sale regime is quite old, and the recent bear market has further exposed its frailty. Indeed, it is only a slight exaggeration to say that compliance with the regime is voluntary for very wealthy taxpayers – or, at least, for those who are willing to take aggressive positions.

    In response, this article flags seven glitches in the regime that, at least arguably, permit “perfect end runs.” This article also takes a more controversial position: Losses should still be deferred – even when taxpayers make meaningful changes in their economic position – as long as they keep material elements of their old return. This article offers two justifications for this broad loss deferral. First, under the “parity” goal, it should be difficult to accelerate losses because it is so easy, under current law, to defer gains. Put another way, since modest economic changes do not trigger gains, they should not trigger losses either. Second, under the “effectiveness” goal, the regime should be sufficiently tough that taxpayers actually give up on tax-motivated loss harvesting, instead of merely pursuing this planning in a more sophisticated way.

  • Tax Policy Group Releases Distributional Breakdowns of House Tax Cuts

    Thursday, May 20, 2004

    The Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution) has released four distributional analyses of the House-passed tax cuts:

    • AMT

    • Child Credit

    • Combined Tax Cuts (I)

    • Combined Tax Cuts (II)

  • NTA Symposium: Tax Policy in Transition

    The National Tax Association holds its 34th Spring Symposium on Tax Policy in Transition on Thursday, May 20 – Friday, May 21 at the Holiday Inn Capitol in Washington, D.C. Here are today’s panel programs and speakers:

    8:45am
    Welcome
    John McClelland (Office of Tax Analysis, Department of the Treasury), Program Chair

    9:00-10:30am
    Revenue and Rules: Effects on the Federal Budget
    Moderator: Eric Engen (American Enterprise Institute)
    Presenters:
    • Where Did Revenues Go? (David Weiner, Congressional Budget Office)
    • The Persistence of Individual and Corporate Capital Gains and Losses (Nicholas Bull, James Cilke & Christopher Giosa, Joint Committee on Taxation)
    • Budget Rules for 2005 and Beyond (Rudolph Penner & C. Eugene Steuerle, The Urban Institute)

    10:45am-12:15pm
    Exploring Selected State and Local Issues
    Moderator: Dennis Zimmerman (Congressional Budget Office)
    Presenters:
    • State Structural Deficits (Bruce Baker, Bureau of Economic Analysis, U.S. Commerce Department; Daniel Besendorfer, University of Freiburg; & Laurence J. Kotlikoff, Boston University)
    • History and Evaluation of the Unfunded Mandates Law (Theresa Gullo, Congressional Budget Office)
    • Is “No Child Left Behind” an Un (or under) funded Federal Mandate? Evidence from Texas
    (Jennifer Imazeki, San Diego State; & Andrew Reschovsky, Wisconsin)

    12:30-2:00pm Luncheon
    Presiding: Thomas S. Neubig (President, National Tax Association)
    Speaker: Harvey S. Rosen (Member, Council of Economic Advisers)

    2:00-3:30pm
    The Role of a Public Policy Economist: Lessons from Bruce Davie’s Career
    Moderator: Allen H. Lerman (Office of Tax Analysis, U.S. Treasury Department)
    Presenters:
    • Jousting with Rent Seekers: Bruce Davie and Tax-Exempt Bonds (Dennis Zimmerman, Congressional Budget Office)
    • The Costs of State-Sponsored Terrorism: The Case of the Barbary Pirates (J. Thomas Woodward, Congressional Budget Office)
    • A Tax Expenditure Budget for Excise Taxes (Lindsay Oldenski, Office of Tax Analysis, U.S. Treasury Department)

    3:45-5:15pm
    Effects of a Changing Pension Landscape on Saving
    Moderator: Karen M. Pence (Federal Reserve Board of Governors)
    Presenters:
    • How Will the Changing Pension Landscape Affect Retiree Benefits? (Amy Rehder Harris, Kevin Perese & John Sabelhaus, Congressional Budget Office)
    • Distributional Effects of Tax-Preferred Saving Options (Leonard E. Burman, The Urban Institute; & William Gale & Peter Orszag, The Brookings Institution)
    • Pension Reform and Saving (Barry Bosworth & Gary Burtless, The Brookings Institution)

  • Cook on Politically Active Churches

    Wednesday, May 19, 2004

    Of particular interest following yesterday’s discussion of whether the Catholic Church’s criticism of Sen. Kerry will result in the loss of its tax exemption: Douglas Cook (Regent) has published The Politically Active Church, 35 Loy. U. Chi. L. Rev. 457 (2004). Here is part of the Introduction:

    The title of this Article appears to be an oxymoron. Conventional wisdom holds that under current law, a church cannot be politically active….[T]he notion that churches may not be involved actively in politics is at the same time inaccurate, misleading, and incomplete.

    Churches, as religious entities, enjoy a special status under … [t]he First Amendment…. Churches, as exercisers of religion, thus have a constitutional right to pursue their religious activities, even if that pursuit takes them into the political arena. Likewise, churches enjoy a First Amendment free speech right to engage in political speech. Courts have never interpreted the Establishment Clause of the Constitution to mean that churches or religious organizations are prohibited from being active in political matters. A politically active church is thus engaging in constitutionally protected activity.

    Nonetheless, many churches have elected to organize and operate under section 501(c)(3) of the Internal Revenue Code (the “Code”). As a condition of enjoying exemption from federal entity income taxation, such churches and many other exempt organizations must refrain from substantial attempts to influence legislation and from any participation in political candidate campaigns. Courts have held that conditioning tax exemption on these political activity limitations does not violate the First Amendment.

    In the face of these clear limitations on 501(c)(3) churches, this Article proposes that churches might elect instead to organize and operate as tax-exempt “social welfare” organizations under section 501(c)(4) of the Code. These organizations are permitted a much wider range of political activities than 501(c)(3) entities. Part II of this Article will summarize existing tax law pertaining to the political activities of 501(c)(3) and 501(c)(4) organizations. Part III will examine how the 501(c)(3) limitations have been applied to churches. Finally, Part IV will present a proposal for organizing churches as 501(c)(4) exempt organizations, allowing them to conduct virtually unlimited lobbying and substantial political candidate activity.

  • Treasury Secretary Snow Testifies on Benefits of HSAs

    Wednesday, May 19, 2004

    Treasury Secretary John Snow testified today on the benefits of Health Savings Accounts (HSAs) before the U.S Senate Special Committee on Aging.

  • House Considering State & Local Tax Deduction as Part of ETI Repeal

    Wednesday, May 19, 2004

    Tax Analysts reports today that the House, as part its consideration of the Extraterritorial Income Exclusion Act (ETI Act), is debating whether to allow taxpayers who live in the 9 states without an income tax (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington & Wyoming) to deduct sales and use taxes. The proposal apparently is based on the Sales Tax Equity Act of 2003 (H.R. 720) introduced last year, but may go further and allow taxpayers in the 41 states with an income tax to deduct the greater of their sales tax or their income tax. Tax simplification anyone? (Thanks to Deborah Geier (Cleveland State) for passing this along.)

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