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Planning and Policy Issues Under the Existing U.S. Rules

Daniel N. Shaviro

in Fixing U.S. International Taxation

This chapter examines some of the main incentives and tax planning opportunities created by existing U.S. international tax rules, and discusses the impact of marginal changes to the rules. It also ... More

This chapter examines some of the main incentives and tax planning opportunities created by existing U.S. international tax rules, and discusses the impact of marginal changes to the rules. It also shows why the current system has such a horrendous ratio of tax planning, compliance, and administrative costs to U.S. revenue raised.Less

Tax Planning by Companies and Tax Competition by Governments: Is There Evidence of Changes in Behavior?

Harry Grubert

in International Taxation and Multinational Activity

Many claims have been made in recent years, both by the popular media and by prominent economists, that we are living in a period of more aggressive tax planning by multinational corporations (MNCs) ... More

Many claims have been made in recent years, both by the popular media and by prominent economists, that we are living in a period of more aggressive tax planning by multinational corporations (MNCs) and more intense tax competition by governments. This chapter examines and analyzes changes in average effective tax rates in sixty countries to determine the responses of governments to the new global environment. It looks at various areas of MNC and government behavior, including the effective tax rates that MNCs pay to host governments. After reviewing the incentives for tax planning by MNCs from the United States and how these may have changed as a result of the Tax Reform Act of 1986, the chapter compares income-shifting behavior in 1984 and 1992 to see if the reported profitability of controlled foreign corporations (CFCs) has become more sensitive to local tax rates. Finally, it examines the relationship between excess credit expectations and the change in royalties received by the parent and reviews CFC rules that eliminate the benefits of using tax havens.Less

The Plan in Brief

Michael J. Graetz

in 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States

This chapter presents the layout of the Competitive Tax Plan. It argues for the elimination of the present broken method of revenue collection and for replacing the lost revenue with a broad-based ... More

This chapter presents the layout of the Competitive Tax Plan. It argues for the elimination of the present broken method of revenue collection and for replacing the lost revenue with a broad-based tax on consumption, which would return the income tax to its pre-World War II status—a low-rate tax on a relatively thin slice of higher-income Americans. The chapter argues that a value-added tax imposed at a rate of 10 to 14 percent could finance a $100,000 family exemption from income tax, eliminating 150 million Americans from the income tax rolls and allowing a simpler income tax at a 20 to 25 percent rate to be applied to incomes over $100,000. It explains that these two taxes, in combination, would produce revenues roughly equivalent to the current income tax.Less

Assessing the Cum-Ex Trade

Richard S Collier

in Banking on Failure: Cum-Ex and Why and How Banks Game the System

This chapter examines how the cum-ex transaction has been assessed to date before arguing that those assessments reflect a limited understanding of the real complexity and wider causes and ... More

This chapter examines how the cum-ex transaction has been assessed to date before arguing that those assessments reflect a limited understanding of the real complexity and wider causes and implications of schemes such as the cum-ex trade. The reaction to cum-ex in the media and in political circles has focused on the scale of financial loss to the state and on the culpability of the individuals involved. This response to cum-ex involves relatively little focus on the nature of the transaction itself or how it came about. However, this chapter raises wider questions as to what transactions like cum-ex tell us about the nature of banks and inter-bank market activities, and what they reveal about tax systems. The chapter also explains what is meant by talking of bank ‘misconduct’, and considers the problematic distinction between tax avoidance and tax evasion.Less

Bring the States Along

Michael J. Graetz

in 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States

This chapter argues that in the U.S. federalist system, in which many traditional government functions are carried out not by the government in Washington but by states and localities, any durable ... More

This chapter argues that in the U.S. federalist system, in which many traditional government functions are carried out not by the government in Washington but by states and localities, any durable reform of the federal system should take into account its effects on the tax collections and budgets of states. It presents the Competitive Tax Plan for the U.S. federal system. The chapter admits that the plan has certain drawbacks for the states, in that it will pressure them to eliminate their income taxes for families making less than $100,000; however, it also has a number of possible benefits for states, especially if they were to adopt similar consumption taxes themselves. The chapter also discusses the consequences of fundamental reforms for the states.Less

Corporate Tax Privacy and Human Rights

Joshua D. Blank

in Tax, Inequality, and Human Rights

This chapter examines the relationship of corporate tax privacy and tax compliance from a new vantage point, which is called the “intercorporate perspective.” In the United States, all tax returns ... More

This chapter examines the relationship of corporate tax privacy and tax compliance from a new vantage point, which is called the “intercorporate perspective.” In the United States, all tax returns and return information of corporations are confidential. An unappreciated value of corporate tax privacy is that it can limit the pressure to pursue aggressive tax planning and reporting that corporate tax directors often face from significant shareholders, nontax managers, and even themselves. Corporate tax privacy provides the government with valuable strategic defenses by restraining the ability of a corporation’s stakeholders and agents to engage in “benchmarking” and “reverse engineering,” behaviors that would likely cause some tax directors to pursue more aggressive tax planning and reporting. Yet, at the same time, increased public access to certain corporate tax return information could enable the public to participate in informed debate and discussion of the corporate tax law and to question whether the governments is applying the tax law to corporate taxpayers effectively and fairly.Less

Progressivity Can Live

in Fair Not Flat: How to Make the Tax System Better and Simpler

Unlike the common flat-tax plans that would raise taxes for the middle class in order to lower them for the rich, the Fair Not Flat Tax affirms America's historic commitment to a moderately ... More

Unlike the common flat-tax plans that would raise taxes for the middle class in order to lower them for the rich, the Fair Not Flat Tax affirms America's historic commitment to a moderately progressive rate structure. Tax relies on varying rate brackets, it involves two distinct kinds of rates. One, a marginal rate, is the rate a taxpayer pays on her next dollar of income. Two, the average, or effective, tax rate comes from dividing the taxpayer's total tax by her total income. A tax system can be progressive, flat, or regressive. A progressive tax is one in which the rich pay a higher average rate than the not rich. A flat, or proportionate, tax is one in which everyone pays the same average rate. A regressive tax is one in which the rich pay a lower average rate than the not-rich. The current inconsistent income tax features progressive marginal rates. It is thus intended to be a progressive tax. The actual pattern of a tax system's progressivity depends on what sort of loopholes and gaps the tax has and on who can take advantage of them.Less

Interrogating the Relationship between “Legally Defensible” Tax Planning and Social Justice

Daniel Shaviro

in Tax, Inequality, and Human Rights

This chapter assesses where the ethical lines should be drawn around what constitutes “legally defensible tax planning,” given social justice imperatives. Because tax minimization by wealthy ... More

This chapter assesses where the ethical lines should be drawn around what constitutes “legally defensible tax planning,” given social justice imperatives. Because tax minimization by wealthy individuals and profitable corporations does not involve blatant fraud, one cannot simply call for “good corporate tax behavior” and criticize the ethics of those tax professionals who aid and abet the fraud. The tax-reducing strategies of super-rich individuals and highly profitable corporations commonly qualify as what will be called “legally defensible.” This term, however, covers tax planning that may vary across a range in at least three important dimensions: likelihood of legal correctness; consistency with legislative or regulatory intent; and ordinary course of business versus carefully contrived.Less

How Countries Should Share Tax Information

Arthur J. Cockfield

in Tax, Inequality, and Human Rights

This chapter looks at exchange of information (EOI) policies, proposing several ways to make EOI policies fairer and more efficient, so as to maximize their potential to reduce illicit financial ... More

This chapter looks at exchange of information (EOI) policies, proposing several ways to make EOI policies fairer and more efficient, so as to maximize their potential to reduce illicit financial flows and curb abusive tax practices that undermine human rights. While there appears increasing policy and academic support for EOI initiatives that promote global financial transparency, the current international tax regime, with its high transaction costs for taxpayers and tax authorities, does not seem particularly amenable to producing optimal outcomes. The chapter then emphasizes how, to promote enforceability, the ideal EOI system delivers high-quality tax information while providing needed legal protections for taxpayer privacy. The exchange and usage of high-quality tax information would reduce transaction costs for tax authorities as they could more readily identify taxpayers engaged in offshore tax evasion and aggressive international tax planning.Less

Taxing Income Is a Flawed Concept

Daniel S. Goldberg

in The Death of the Income Tax: A Progressive Consumption Tax and the Path to Fiscal Reform

This chapter delves into the structure of the income tax and explains the flaws inherent in any tax on income that is self-assessed and collected from the earner of that income. These flaws include ... More

This chapter delves into the structure of the income tax and explains the flaws inherent in any tax on income that is self-assessed and collected from the earner of that income. These flaws include reliance on realization to determine whether appreciation in the value of property is taxable, the need to draw lines between capital and currently deductible and the resulting need to deal with depreciation and character of gain, and between personal and business to determine deductibility. These inherent flaws are not fixable by tweaks because they come with the structure. The view expressed in this chapter does not resort to emotional arguments against the IRS or the concept of taxation in general. Rather, the chapter deals specifically with the structure of a direct tax on income.Less

A Summary, of Sorts: Anatomy of a Tax Shelter

Edward J. McCaffery (ed.)

in The Oxford Introductions to U.S. Law: Income Tax Law

This chapter briefly considers use of tax shelters in tax planning. With its capability of unlimited interest deduction, tax shelters became very useful for those wanting to pay lower taxes. However, ... More

This chapter briefly considers use of tax shelters in tax planning. With its capability of unlimited interest deduction, tax shelters became very useful for those wanting to pay lower taxes. However, these capabilities were prohibited by the Tax Reform Act of 1986 due to the threat it posed to the U.S. tax system. By using hypothetical situations and past landmark cases, this chapter also illustrates the process of tax sheltering using the four basic techniques: interest dodge, simple straddle, classic shelter, and the kiddie shift. It further examines the Tax Reform Act of 1986, identifying what it did and did not do and tackles the important question of whether the Internal Revenue Code is enough to prohibit illegal taxation abuse.Less

A bribery event that never happened: The case of businessman Vernon Drabek

Roger W. Shuy

in The Language of Bribery Cases

A city council member misunderstood Drabek’s offer to help her employ a tax resale plan as a way to get credit for solving a city problem and also to help her with campaign financing, including a ... More

A city council member misunderstood Drabek’s offer to help her employ a tax resale plan as a way to get credit for solving a city problem and also to help her with campaign financing, including a check for $1,000. She misunderstood the check as a bribe for getting the city to buy one of Drabek’s properties. In an effort to prove this, she taped eight meetings with Drabek, who considered the meetings to be business advice speech events and campaign contribution speech events. The city council member considered them bribery speech events. Analysis of the schemas, speech acts, and conversational strategies demonstrated how the two were in different speech events. This is a case in which the prosecutor’s wise intelligence analysis of the questionable undercover tape evidence caused him to drop the charges.Less

The “How Much” of Taxation: Characterization of Ordinary Income and Capital Gains

Edward J. McCaffery (ed.)

in The Oxford Introductions to U.S. Law: Income Tax Law

This chapter introduces conversion of capital gains, which characterizes any gain as capital thus allowing one to pay taxes lower than the ordinary income rate. It lists the reasons for preference of ... More

This chapter introduces conversion of capital gains, which characterizes any gain as capital thus allowing one to pay taxes lower than the ordinary income rate. It lists the reasons for preference of this issue which includes avoiding the double-taxation of savings, accounting for inflation, and dealing with “bunching”, where realized capital gains come in small bunches. The chapter also shows how the U.S. tax system is somehow forced to recognize capital gains and give taxpayers a lower tax rate in order to move assets along and keep the economy moving. Various landmark cases are cited where the argument of capital gains was used, including its abuse by venture capital and hedge funds.Less

Myron S. Scholes

Roger W. Spencer and David A. Macpherson

in Lives of the Laureates: Twenty-three Nobel Economists

This chapter looks at the career of Myron S. Scholes who received the Nobel Prize in 1997. Born in 1941, Scholes went to McMaster University for his B.A. and completed his Ph.D. at the University of ... More

This chapter looks at the career of Myron S. Scholes who received the Nobel Prize in 1997. Born in 1941, Scholes went to McMaster University for his B.A. and completed his Ph.D. at the University of Chicago in 1969. He became a professor at the Graduate School of Business, University of Chicago, and a professor of finance, emeritus, at Stanford University. Together with Mark Wolfson, he developed a new theory of tax planning under uncertainty and information asymmetry. His work as an economist was shaped by attempts to conceptualize and test real-world problems. He helped invent the concept of the index fund. His other works involved developing models to explain changes in the prices of risk transfer and liquidity in the market. He wrote Taxes and Business Strategy: A Planning Approach in collaboration with Wolfson.Less