Florida Tax Review

Book Review: Tax Without Law

Susan C. Morse — Mon, 16 Dec 2024 00:00:00 -0500

Review of: Wei Cui, The Administrative Foundations of the Chinese Fiscal State. Cambridge University Press, 2022. Pp. xiv, 288.

Ethical Attitudes Toward Taxes in the U.S.

Donald L. Ariail, Dennis R. Lassila, Anita Reed, Lawrence Murphy Smith — Mon, 16 Dec 2024 00:00:00 -0500

This study examines ethical attitudes toward taxation in the United States (U.S.). The U.S. system, as in many other countries, relies on
voluntary compliance, where taxpayers calculate their own taxes due. Thus, ethicality of taxpayers is of critical importance. This study updates prior research on taxpayer ethical attitudes, such as comfort level with tax evasion, views on punishment for tax evasion and perspectives on civic duty to pay a fair share of taxes. A comparison is made with a benchmark study of 20 years ago. In addition, a demographic analysis is provided of current taxpayer ethical attitudes based on: age, gender, citizenship versus non-citizen, academic major, student status, employment status, and work experience. Findings will be of interest to policy makers, academic researchers, and taxpayers.

Business-Entity Charitable Workarounds

Karen C. Burke — Mon, 16 Dec 2024 00:00:00 -0500

In 2017 Congress enacted a controversial $10,000 cap on individual deductions for state and local taxes. States initially responded by enacting charitable workarounds which invited individual taxpayers to convert capped § 164 deductions for state income taxes into uncapped § 170 deductions for contributions to charitable organizations in exchange for state income tax credits that reduced or eliminated state tax liability. Final regulations under § 170 shut down the tax shelter by treating state tax credits received in exchange for charitable payments as a quid pro quo, reducing or eliminating any charitable deduction. In 2020, acceding to pressure from business groups and school choice advocates, the outgoing Trump administration blessed a functionally equivalent business-entity charitable workaround which circumvents the SALT cap by exploiting discontinuities under §§ 162, 164 and 170. Passthrough owners obtain an ordinary § 162 business deduction for entity-level payments to § 170 organizations, coupled with passthrough of state tax credits that reduce or eliminate the owners’ state income tax liability. The Treasury can and should close this loophole by requiring a separate statement, subject to the § 164(b)(6) limit, of entity-level deductions attributable to payments to charitable organizations that generate state ncome tax credits. Whether or not Congress retains the SALT cap, passthrough owners should not be permitted to convert nondeductible individual state income taxes into fully deductible business expenses.

ESG and the Demand for State Tax Incentives

Mark J. Cowan, Joshua Cutler — Mon, 16 Dec 2024 00:00:00 -0500

This Article argues that a business which embeds environmental, social, and governance (ESG) considerations in its strategy should consider whether seeking or accepting targeted state and local economic development incentives (which we refer to as “state tax incentives”) is consistent with that strategy. The outcome of that consideration will vary by locality, incentive package, and strategy. But given the demonstrated negative impact of state tax incentives on government finances and the community, most ESG-minded companies should either forgo them or cooperate with the state in crafting incentives that benefit both the company and the community. A well-crafted ESG reporting standard on this topic can help guide companies towards such win-win incentives and help them credibly communicate their approach to investors and other stakeholders. This Article proposes that companies, investors and governments should lobby ESG standard setters to create an effective reporting standard, and we offer some recommendations for its characteristics. We believe this is the first article to examine state tax incentives in the context of ESG and the first to suggest that the demand for state tax incentives can be reduced as more companies (and their investors) realize that taking incentives is inconsistent with their ESG strategies. All prior attempts to curtail state tax incentives have targeted the supply of state tax incentives by seeking to encourage or force states to limit their use. These attempts are essential and must continue. But they have not achieved the hoped-for results, in part, because they relied on persuading political actors to stop taking actions that they believe are in their own self-interest. In contrast, a demand side, company-and investor-driven approach may be more successful because applying an ESG framework requires companies to act in their own interest, while better taking into account long-term costs and benefits. This Article explains the problems that have resulted from state and local tax incentives and the various efforts to curtail them; reviews the emerging concept of ESG; applies the literature on tax avoidance and corporate social responsibility to state tax incentives; provides a basic outline for a state tax incentive ESG reporting standard; highlights the strategic benefits that will accrue to a company that takes a more deliberate
approach to deciding whether to seek and accept state tax incentives; and identifies issues at the intersection of ESG and state tax incentives that are ripe for future research.

Tax Law Enforcement and Redistributive Policies

Yehonatan Givati, Andrew T. Hayashi — Mon, 16 Dec 2024 00:00:00 -0500

The Inflation Reduction Act signed by President Biden on August 16, 2022, allocated $80 billion in additional funding for the IRS. While Democrats unanimously supported the bill, not a single Republican voted in favor of it. The first legislation advanced by the new Republican majority in 2023 was to repeal this increase in IRS funding. Given the diminished state of IRS enforcement capacity, increasing the resources devoted to tax enforcement seems like an obvious imperative without a clear partisan valence. One might think that political and ideological battles would be fought over what the tax law is, not whether the IRS has the resources to enforce it. But IRS funding has become a major political point of contention. Why is tax law enforcement such a partisan issue?

In this Article we propose an answer. We argue that the income tax is the primary instrument for income redistribution, and so the efficacy of tax enforcement shapes people’s support for redistribution. When the IRS makes sure people pay their taxes, support for income redistribution increases. And when the IRS is unable to enforce the nation’s tax laws, support for income redistribution decreases. Thus, for political progressives increasing tax enforcement generates a double dividend. It both provides more funds for redistribution and also increases political support for redistribution, which can then be translated into redistributive changes to the tax law. For symmetric reasons, reducing tax enforcement generates a double dividend for those who disfavor income redistribution.

To support our theory, we use unique data from the General Social Survey on perceptions of tax law enforcement. We show that perceptions of tax enforcement are strongly correlated with redistributive preferences. Specifically, people who think that tax law is underenforced are less likely to support income redistribution. We find similar results when looking at specific redistributive welfare programs. To disentangle causation from correlation, we administered a national representative survey which specifically asked about the effects of increased tax law enforcement on support for redistribution.

Thus, tax law enforcement does not only determine the amount of tax revenue we collect; it also shapes our redistributive preferences which in turn affects our redistributive polices. This means that as long as our political parties are divided about the desirability of income redistribution, the political battles around IRS funding and enforcement are not likely to wane.

Safeguarding Taxpayer Data

Michael Hatfield — Mon, 16 Dec 2024 00:00:00 -0500

The Internal Revenue Service (IRS) collects more information on more individuals than any other government agency. The information is not only financial but personal, potentially including information about health care needs and decisions; the caregivers, disabilities and foreign birth of children; the educational progress and felony convictions of students; and one’s religious and charitable associations. In acknowledging the vast quantity of information held by the IRS, and the necessity of taxpayers trusting tax administrators with their information, Congress provided greater protection for taxpayer information under the Internal Revenue Code (IRC) than it was provided under the Privacy Act. Congress obligated IRS employees to keep taxpayer information confidential, and authorized felony charges and damages suits, including punitive damages for inappropriate disclosures of taxpayer information. These special protections were enacted almost 50 years ago, long before the spread of the internet and emergence of cybercrime. This Article proposes updating the IRC’s special protections for taxpayer information to reflect the cybersecurity objectives of the Federal Information Security Modernization Act (FISMA), and the frequent audits of the IRS by its Inspector General that show the IRS’s persistent failures to comply with FISMA guidance, such as failing to encrypt taxpayer data, secure mainframe platforms, regulate system access, remediate known vulnerabilities and assist victims of data breaches.

Unbundling Social Security from the Payroll Tax

Henry Ordower — Mon, 16 Dec 2024 00:00:00 -0500

This Article emphasizes that social security funding has contributed significantly to the shift in tax burdens from high income and wealth to low and moderate income and wealth individuals. To preserve social security as a welfare program primarily for older individuals and to ameliorate the distributional inequity of funding social security across income and wealth levels, the Article proposes unbundling of the benefit side of social security from its longstanding payroll tax funding mechanism. The Article recommends substituting a budget allocation from general revenues for current payroll tax revenue. The substitution would be accompanied by revenue replacement through limitations on both social security benefits for higher income individuals and more general, high income centric tax expenditures while increasing income tax marginal rates moderately. Modifying social security benefits from their current overinclusive, entitlement structure for all to moderately needs-based entitlement possibly freed from the constraint of the current contribution requirement that makes social security underinclusive would help provide the older population an income to facilitate dignified aging.

Guaranteed Wealth?

Eric Reis — Mon, 16 Dec 2024 00:00:00 -0500

Wealthy parents have found an ingenious way to magnify their children’s assets without paying gift tax. Rather than transfer assets to the children directly, a parent may encourage her children (or trusts for the children’s benefit) to borrow funds as needed to make investments. The parent stands behind that debt by making a personal guarantee, assuring the lender of repayment and thereby allowing the children to borrow and invest far more than they otherwise could. The Internal Revenue Service clearly believes that such guarantees should be treated as gifts but has hesitated to press that position or develop a framework for doing so. This Article provides that framework, drawing on analogous corporate tax cases to show the way.

For gift tax purposes, when a person guarantees a loan to a related party, the loan would be recharacterized as a loan from the lender to the guarantor, followed by a second loan on the same terms from the guarantor to the ultimate borrower. Each loan would then be tested under existing doctrines to see whether it should be respected as debt. In most cases, the second deemed loan (from the guarantor to the ultimate borrower) would not be respected as debt, because the ultimate borrower lacks the income or resources to justify the extension of credit. As a result, the second deemed loan would be recharacterized as a gift to the ultimate borrower rather than a loan. This framework would severely curtail the use of guarantees to grow dynastic wealth.

The Role of Marriage in the Internal Revenue Code

Theodore P. Seto — Mon, 16 Dec 2024 00:00:00 -0500

This Article offers a new descriptive account of the role of marriage in the federal tax system. It first outlines an economic frame that explains both why marriage is economically valuable—marriage produces large amounts of untaxed surplus—and why its legal structure is as it is—drawing on both Coase and the theory of numerus clausus. The Article then suggests that most federal tax rules that turn on marriage can be understood as solutions to one of two interrelated problems: “entanglement” and “relative indifference.” By “entanglement,” I refer to the fact that the daily activities of spouses are commonly so intertwined as to make standard rules for their taxation impossible to apply, even if we wanted to. By “relative indifference,” I refer to the fact that entangled spouses often do not care who owns what, owes what, earns what or pays what to the degree they would if they were not interpersonally committed. As a result, they are often able to engage in tax avoidance behaviors that atomistically motivated actors would find unattractive.