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Abstract:
This article analyzes the effect of tax law doctrines designed to reduce tax shelters, such as the business purpose doctrine, and the economic substance doctrine. The article analyzes these doctrines as changes to the marginal elasticity of taxable income. As these doctrines are strengthened, the elasticity of taxable income goes down (in absolute value). By reducing the marginal elasticity of taxable income, the doctrines increase the efficiency of the tax system. Because the doctrines cannot perfectly identify tax avoidance, however, they induce a distortionary response by taxpayers, who may structure shelters to avoid the doctrines. This distortionary effect reduces their efficiency. The net benefit should be set equal on the margin to the marginal administrative cost of the doctrines.

Abstract:
This essay analyzes the problem of corporate tax avoidance. It shows how the marginal efficiency cost of funds and optimal elasticity of taxable income measures can be used to analyze the problem and determine the proper scope of allowable tax planning. It then analyzes the optimal form of tax laws addressing shelters, such as whether the law should use more detailed rules or broad standards.

taxation, tax planning, tax law, tax shelters

Abstract:
This paper considers the arguments regarding the choice between an ideal income tax and an ideal consumption tax, focusing on an argument made by Atkinson and Stiglitz regarding neutral taxation of commodities. The argument shows that a properly designed consumption tax is Pareto superior to an income tax: it is more efficient and at least as good at redistribution. The major exception to the Atkinson and Stiglitz result is if individuals with equal wages have different propensities to save. In that event, a consumption tax may no longer be Pareto superior to an income tax. A consumption tax will continue, however, to be more desirable than an income tax. It will be strictly more efficient than an income tax, and under reasonable assumptions, better at redistributing from those who are better off to those who are worse off. This result holds true even if one heavily weights the welfare of the poor.

taxation, Atkinson and STiglitz, neutral taxation of commodities

Abstract:
Some of the most important disagreements about how aggressively to respond to the threat of climate change turn on the choice of the discount rate. A high discount rate implies relatively modest and slow reductions; a low discount rate implies immediate and dramatic action. The debate between the two sides reflects a disagreement between the positivists, who argue for a market rate, and the ethicists, who urge that the positivist approach violates the duty of the present to the future. We argue that the positivists are largely right, and that the question of discounting should be separated from the question of the ethical duties of the present. Discounting is a means of taking account of opportunity costs, and a refusal to discount may well hurt, rather than help, future generations. Nonetheless, it is also possible that cost-benefit analysis with discounting will impose excessive harms on future generations. If so, the proper response is to make investments that will help those generations, not to refuse to discount. We also explore several questions on which the ethicists' legitimate objections require qualification of the positivists' arguments, justifying a low discount rate for climate change policy.

discounting, future generations, climate change, intergenerational neutrality

Abstract:
This essay analyzes the tax treatment of carried interests in private equity. It argues that there are two competing analogies: service income and investment income. Standard approaches are not able to resolve which of the competing analogies is better and often fail even to recognize that there are competing analogies. The best method for determining the proper treatment of carried interests is through direct examination of the effects of each of the possible treatments, known as the theory of line drawing in the tax law. From this approach, it is clear that the better treatment of holders of carried interests is as investors. Key pieces of evidence include the longstanding policy premises behind partnership taxation and the complexity and avoidance problems with attempts to tax carried interests as service income. Send comments.

tax law, service income, investment income

Abstract:
This paper analyzes the consequences of the findings from research into self-reported well being or happiness for taxation. It primarily considers two findings: that happiness depends on status as well as income, and that individuals may adapt to disability, exhibiting relatively small losses in happiness from disabilities. In each case, it examines how adding these concerns to standard tax models changes the results and then compares the empirical findings of the happiness literature to see whether they provide the type of data needed to parameterize the models. In both cases, the theoretical models ask for different types of data than the happiness studies emphasize. The paper also looks at Robert Frank's arguments for a progressive consumption tax based on the findings of the happiness research. It finds that these claims are not supported by the current findings.

Abstract:
We consider the design of a tax on greenhouse gas emissions for a developed country such as the United States. We consider three sets of issues: the optimal tax base, issues relating to the rate (including the use of the revenues and rate changes over time) and trade. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing fewer than 3,000 taxpayers and up to almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect new information about the costs of carbon emissions and of abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-based system for trade with countries that have an adequate carbon tax and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments with the ability of an individual firm to prove that a different rate should apply. The presumptive tax could be based either on average emissions for production of the item by the exporting country or by the importing country.

Abstract:
This paper advances ten propositions about tax shelters and tax avoidance. The first four propositions argue that tax shelters must be analyzed solely by the consequences of shelters and the responses, rejecting reasoning based on notions such as the right to tax plan, legitimate tax planning, or statutory interpretation. The next three propositions analyze the consequences of tax shelters by viewing shelters as unintentional gaps in the tax base and attacks on shelters as similar to broadening the base. At the margin, the benefits of broadening the base must be set equal to the administrative costs of doing so and the propositions examine these costs and benefits in detail. The last three propositions discuss issues relating to implementing anti-shelter rules, including the problem of getting empirical estimates, and the role uncertainty and motive should play.

Abstract:
This paper advances ten propositions about tax shelters and tax avoidance. The first four propositions argue that tax shelters must be analyzed solely by the consequences of shelters and the responses, rejecting reasoning based on notions such as the right to tax plan, legitimate tax planning, or statutory interpretation. The next three propositions analyze the consequences of tax shelters by viewing shelters as unintentional gaps in the tax base and attacks on shelters as similar to broadening the base. At the margin, the benefits of broadening the base must be set equal to the administrative costs of doing so and the propositions examine these costs and benefits in detail. The last three propositions discuss issues relating to implementing anti-shelter rules, including the problem of getting empirical estimates, and the role uncertainty and motive should play.

Abstract:
This essay responds to an article by Daniel Shaviro which argues in part that the failure of empirical assumptions behind the permanent income hypothesis undermines the case for preferring consumption taxation over income taxation. We consider each of Shaviro's arguments and conclude that none change the basic considerations in favor of consumption taxation in any significant way. Shaviro concludes that administrability and implementation concerns should be central to the choice of the tax base and that these concerns are likely to point to taxing consumption. We agree with this conclusion.

Abstract:
This paper considers whether the original issue discount rules, which require current taxation of interest income regardless of whether it is paid, should be expanded to cover derivative financial instruments. The original issue discount rules were recently expanded to debt instruments with contingent payments (so-called "structured notes"), and commentators have advocated using similar principles to expand the rules to other derivatives.

The paper argues that the original issue discount rules should not be expanded beyond their current scope. The current accrual requirement is inconsistent with the realization requirement, and expansion of the current accrual requirement merely moves the place where the rules are inconsistent. Expansion of the original issue discount rules cannot eliminate or even reduce the inconsistency in the law. Using a theory of the most efficient place to draw lines between inconsistent tax rules, the paper argues that current law is superior to an expansion of the original issue discount rules.

Abstract:
This paper examines how lines should be drawn between similar activities within the tax law. Line drawing is a pervasive and enduring problem in the tax law. For example, the tax law draws distinctions between selling and holding, debt and equity, and between independent contractors and employees. Existing scholarship does not address this line drawing problem in any comprehensive way, and traditional tax norms, such as the Haig Simons definition of income, fail in this context. This paper suggests (i) that the problem can be analyzed comprehensively by drawing lines where it is most efficient to do so; and (ii) efficiency is the appropriate method of analysis. The paper then uses optimal tax models to develop the intuitions for efficient line drawing and discusses several applications.

Abstract:
While the Flat Tax has attracted substantial attention, proponents of the tax have not given any details of its implementation. Without this detail, evaluation of the tax is difficult. Claims of simplicity may be false. The efficiency claims for the Flat Tax rely on its relative unavoidability and its cleanly stated economic incentives, but without details, these claims cannot be evaluated. Moreover, the distribution of the tax burden will be affected by its implementation. This article attempts to fill in the gap by considering the design issues presented by the Flat Tax. A wide variety of issues are considered, including the Flat Tax taxation of financial transactions, business formations and reorganizations, small businesses, accounting methods, and international transactions. The major finding is that the regime will be complex and difficult to implement, although still somewhat simpler than current law. The tax will also be easily avoidable, which will reduce its efficiency. Without the claims of simplicity and efficiency, the argument for the Flat Tax becomes extremely weak.

Abstract:
One of the major claims of the promoters of the Flat Tax is that it would be simple to administer. Yet to date, no details of the design have been offered, which makes evaluation of the administrative costs difficult. This paper attempts to fill in the gap by considering the design issues presented by the Flat Tax. A wide variety of issues are considered, including the Flat Tax taxation of financial transactions, business formations and reorganizations, small businesses, accounting methods, and international transactions. The major finding of this paper is that there would be significant administrative difficulties in implementing the regime. Even with significant administrative difficulties, however, the regime would most likely be simpler than current law in many respects.

Abstract:
A long line of literature argues that income taxes do not tax the return to risk bearing. The conclusion, if correct, has important implications for the choice between an income tax and a consumption tax and for the design of income taxes. The literature, however, on its face seems unrealistic because it models only very simplified tax systems, assumes perfect rationality by individuals, and requires the government to take complex positions in securities markets to hold in equilibrium. This paper examines the extent to which these problems affect the conclusions we draw from the literature. It argues that the criticisms are overstated. Moreover, the criticisms do not detract from the central value of the models, which is to understand ideal income taxes, which are the purported goal of most who support an income tax.

income tax

Abstract:
This paper, presented as the Coase Lecture at the University of Chicago Law School, summarizes in a non-technical fashion the recent literature on the use of legal rules to redistribute income. The argument, as made in prior literature, is that the tax system is likely to be superior to legal rules for redistribution of income because it focuses directly on the relevant margins.

Coase lecture, tax law

Abstract:
This paper provides a theory for deciding when a spending program should be implemented through the tax system. The decision is traditionally thought to be based on considerations of tax policy. The most common theories are the comprehensive tax base theory and the tax expenditures theory, both of which rely on tax policy to make the determination. We argue instead that the decision should be based solely on consideration of organizational design. Activities should be grouped together in a way that achieves the best performance, much like a corporation decides how to divide its business into divisions. Tax policy is entirely irrelevant to the decision. This paper begins the process of applying organizational design theory to the tax and spending problem, considering theories of hierarchies based on the needs for specialization in and coordination of activities. The paper then analyzes whether food stamps and the earned income credit should be implemented in through the tax system based on this analysis.

tax policy, tax base theory, tax expenditures theory

Abstract:
This paper argues that firm-level income taxes have an irreducible core of complexity, stemming from the ability to hold and sell an asset in two ways: directly and through the stock of a subsidiary. Both methods of selling must be taxed but coordinating the tax at each level, stock and assets, leads to complexity and line drawing. There are two implications. First, much of the doctrinal rules found in the current corporate tax can be explained through this overarching framework. Second, reform proposals will not be able to eliminate the core of complexity. The Comprehensive Business Income Tax is used as an example: the paper argues that it will inevitably have much of complexity associated with the current corporate tax.

Abstract:
This paper considers tax expenditures from two related perspectives. First, it analyzes how the incentives on Congress to use a tax expenditure change when principal agent problems are considered. For example, it considers whether tax expenditures can reduce moral hazard or adverse selection problems created by delegations to expert agencies. Second, it considers the condition under which tax expenditures should be expected to be redundant with direct expenditures, as many are. The two, principal agent problems and redundancy, are related because redundancy is often seen as a solution to the principal agent problem. The paper concludes that both principal agent concerns and redundancy might lead to an increase in the use of tax expenditures, although the circumstances in which we should expect this are relatively narrow. The paper then examines the example of the low income housing tax credit, concluding that the credit should be replaced with a direct expenditure in the form of increased tenant vouchers.

Abstract:
This paper examines the data on responsibility for climate change due to past emissions. It addresses two aspects of responsibility. First it shows that the data present a mixed picture. By some measures, developed or wealthy countries are responsible for most past emissions while on other means, responsibility is spread widely with poor countries responsible for a majority of emissions. The differences in the measurements are due two factors: whether the data uses a comprehensive measure of emissions and the extent to which the data is aggregated into regions. The more comprehensive the measure and the less aggregation, the more that poor countries are responsible for past emissions. Second, it examines how theories of responsibility apply to the data. The most well developed theories of responsibility that impose an obligation on injurer to make a payment to victims are the theories underlying tort law. The paper shows that standard fault-based tort theories cannot be used to support climate change obligations. Instead, the theory would have to rely on strict liability, give up on the normally required connection between injurer and victim, and accept undesirable distributive consequences. Moreover, it would not be a basis for ongoing obligations to reduce emissions because relative emissions of nations will change over time. Instead, were such a theory of obligation to be sustainable, it could only be used to support a one-time payment for harm.

Abstract:
This paper examines the data on responsibility for climate change due to past emissions. It addresses two aspects of responsibility. First it shows that the data present a mixed picture. By some measures, developed or wealthy countries are responsible for most past emissions while on other means, responsibility is spread widely with poor countries responsible for a majority of emissions. The differences in the measurements are due two factors: whether the data uses a comprehensive measure of emissions and the extent to which the data is aggregated into regions. The more comprehensive the measure and the less aggregation, the more that poor countries are responsible for past emissions. Second, it examines how theories of responsibility apply to the data. The most well developed theories of responsibility that impose an obligation on injurer to make a payment to victims are the theories underlying tort law. The paper shows that standard fault-based tort theories cannot be used to support climate change obligations. Instead, the theory would have to rely on strict liability, give up on the normally required connection between injurer and victim, and accept undesirable distributive consequences. Moreover, it would not be a basis for ongoing obligations to reduce emissions because relative emissions of nations will change over time. Instead, were such a theory of obligation to be sustainable, it could only be used to support a one-time payment for harm.

Abstract:
This paper extends the Domar and Musgrave results concerning the effect of an income tax on risk taking to the case where different tax rates apply to different types of assets. Although the results depend on exactly how the differential tax rates are imposed, as a general matter, an income tax with differential rates can be seen as a tax only on the risk-free rate of return and a fixed ex ante subsidy for purchasing the lower-taxed assets. There are implications for measuring deadweight loss from differential taxation and for spending resources on accurately measuring capital income.

taxation, risk-taking, dead-weight loss, income taxation

Abstract:
Depreciation is difficult and expensive to measure yet central to measuring capital income. This paper considers whether measurement resources should be allocated to longer-term assets on the theory that depreciation matters more for long-term than for short-term assets. This paper argues that accuracy in depreciation is equally or more important for short-term as for long-term assets. Nevertheless, measurement costs are likely to be higher for short-term assets than for long-term assets, which means we might expect less accuracy, all else equal, for short-term assets.

Abstract:
The article examines the implementation of a two-tier consumption tax, which is a variation of a proposal made by David Bradford under the name x-tax. A two-tier consumption tax is a tax on consumption by imposing a progressive wage tax on individuals coupled with a cash-flow or VAT-like tax on businesses (and granting the businesses a wage deduction). The article argues that a two-tier consumption tax has many desirable features and is worth serious attention but acknowledges that designing a workable system is a challenge. The article focuses on three primary issues: problems that may arise under GATT because the two tier consumption tax must be origin-based under GATT, which may lead to significant avoidance problems; utilizing a credit invoice VAT rather than a subtraction method VAT; and transition issues that will need to be addressed in implementing a two tier consumption tax.

Consumption tax, VAT, tax reform

Abstract:
This paper examines the implementation of two-tier consumption taxes, which are business-level VAT-like taxes with a progressive wage tax at the employee level and a wage credit or deduction at the business level. The focus is on a proposal known as the x-tax. The x-tax has many desirable features and is worth serious attention. Nevertheless, designing a workable two-tier system will be a challenge. The paper examines three issues in particular. First, the x-tax and all two-tier consumption taxes raise implementation problems because they must be origin-based under the GATT yet origin-based systems, it is argued, have significant avoidance problems. Second, the x-tax and most U.S. proposals purport to be based on the subtraction method. The credit invoice model, however, may be more appropriate. Finally, the paper discusses transition.

Consumption tax, VAT, tax reform

Abstract:
This paper analyzes the choice between taxes and cap and trade systems (also referred to here as a permit system or a quantity restriction) as methods of controlling greenhouse gas emissions. It argues that in the domestic context, with proper design, the two instruments are essentially the same. Commonly discussed differences in the two instruments are due to unjustified assumptions about design. In the climate change context and within a single country there is sufficient design flexibility that these differences can be substantially eliminated. To the extent that there are remaining differences, there should be a modest preference for taxes, but the benefits of taxes are swamped by the benefits of good design; even though the very best tax might be better than the very best quantity restriction, the first order of business is getting the design right.

In the international context, however, taxes dominate more strongly. The design flexibility available within a single country is reduced in the international context because of the problems of coordinating systems across countries and minimizing holdouts. Moreover, the incentives to cheat and the effects of cheating are not equivalent for the two instruments in the international setting. Because climate change will require a global system for emissions, these considerations mean we should favor taxes for controlling greenhouse gas emissions.

Abstract:
This essay explores the extent to which income and consumption taxes can be implemented using parallel designs. The economic differences in the two taxes is thought to be the taxation of pure time value returns under an income tax but not under a consumption tax. In theory, therefore, all differences in implementation methods should be traceable to the measurement of time value returns. To explore the extent to which this is true, the essay examines four major design elements of any tax system: (i) the use of cash flows or basis accounts to measure the base; (ii) remittance of the tax by firms or individuals; (iii) whether the system is open or closed; and (iv) how the system operates across borders.

taxation, income taxation, consumption taxation, international taxation

Abstract:
This paper uses the tools of optimal tax theory to examine policy toward individuals with disabilities from a welfarist perspective. Policy toward the disabled depends on how a given disability affects welfare. Under reasonable assumptions, redistribution toward individuals with disabilities is desirable, but the extent and form depends on a variety of factors. If disabilities are observable, adjustments to the income tax schedule should be preferred. If disabilities are not observable, commodity taxes or in-kind provision of certain goods (such as accommodations) may be desirable to solve screening problems. In this case, inefficient over-supply of these goods is likely to be optimal. Finally, to the extent needs of the disabled are public goods, supply of such goods may be desirable (even if disabilities are observable).

Abstract:
This paper argues that discounting costs and benefits of projects for the opportunity costs of capital Pareto dominates decision criteria that do not discount. It considers and rejects several objections to the Pareto dominance argument, including the problem of making compensating transfers for the costs and benefits of projects and whether taking opportunity costs into account is different than discounting. It also argues that discounting future costs and benefits of projects does not under-value future generations.

Abstract:
Herwig Schlunk, in his paper "Little Boxes: Can Optimal Commodity Tax Methodology Save the Debt-Equity Distinction?" argues that the theory for line drawing in the tax law developed in several of my prior articles is flawed. In particular, Schlunk argues that the method is path dependent and, therefore, arbitrary. Moreover, he argues that it will be defeated by taxpayer manipulation, such the use of arbitrage or hybrid positions.

This article responds to Schlunk's paper. I show here that the line drawing methodology is not path dependent in any unique way. Schlunk's argument relies on an unjustified assumption that prior line drawing decisions in the tax law will not be revisited when new information become available. Without this assumption, his claim fails. Moreover, if decisions cannot be revisited, line drawing theory would not become arbitrary, contrary to Schlunk's claim. Instead, line drawing decisions would have an option element that would have to be priced in the decisions.

Commodity tax, debt-equity, tax law, tax methodology, Schlunk

Abstract:
We consider the design of a tax on greenhouse gas emissions for a developed country such as the United States. We consider three sets of issues: the optimal tax base, issues relating to the rate (including the use of the revenues and rate changes over time) and trade. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing fewer than 3,000 taxpayers and up to almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect new information about the costs of carbon emissions and of abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-based system for trade with countries that have an adequate carbon tax and a system of border taxes for imports from countries without a carbon tax. We suggest a system that imposes presumptive border tax adjustments with the ability of an individual firm to prove that a different rate should apply. The presumptive tax could be based either on average emissions for production of the item by the exporting country or by the importing country.

Abstract:
This article analyzes the effect of tax law doctrines designed to reduce tax shelters, such as the business-purpose doctrine, and the economic-substance doctrine. The article analyzes these doctrines as changes to the marginal elasticity of taxable income. As these doctrines are strengthened, the elasticity of taxable income goes down (in absolute value). By reducing the marginal elasticity of taxable income, the doctrines increase the efficiency of the tax system. Because the doctrines cannot perfectly identify tax avoidance, however, they induce a distortionary response by taxpayers, who may structure shelters to avoid the doctrines. This distortionary effect reduces their efficiency. The net benefit should be set equal on the margin to the marginal administrative cost of the doctrines.

Abstract:
A long line of literature argues that income taxes do not tax the return to risk bearing. The conclusion, if correct, has important implications for the choice between an income tax and a consumption tax and for the design of income taxes. The literature, however, on its face seems unrealistic because it models only very simplified tax systems, assumes perfect rationality by individuals, and requires the government to take complex positions in securities markets to hold in equilibrium. This paper examines the extent to which these problems affect the conclusions we draw from the literature. It argues that the criticisms are overstated. Moreover, the criticisms do not detract from the central value of the models, which is to understand ideal income taxes, which are the purported goal of most who support an income tax.

Abstract:
This report argues that the recent decision of the Fifth Circuit in Compaq v. Commissioner is seriously misguided and may have adverse consequences for the tax system if not reversed either by the Supreme Court or legislatively. In particular, it criticizes the Fifth Circuit's discussion of the pre-tax profit and business purpose requirements, and argues that these requirements should be interpreted in light of the purpose that antiabuse doctrines serve, which is to filter out tax arbitrage transactions that appear likely to be socially undesirable.

Abstract:
This paper considers the use of so-called "anti-abuse rules" in the tax law. Anti-abuse rules are standards that override the otherwise applicable rules. They allow the government and only the government to override the literal words of a statute or regulation to require a reasonable tax result. The government may apply an anti-abuse rule if the taxpayer enters into or structures a transaction with a principal purpose of reducing tax liabilities contrary to the purposes of the statute or regulation, even if the transaction otherwise literally complies with the rules.

The most important feature of anti-abuse rules is their substitution of standards for rules. The paper argues that standards provide a trade-off with a more traditional rule-bound approach to the tax law. The argument is that, at least in the tax law, rules must be systematically more complex than standards. Tax rules must be highly complex because mistaxation of even a rare transaction allows taxpayers to structure transactions to take advantage of the result. With rules, uncommon transactions become common. Standards allow the tax law to be less complex than rules because they need not specify in advance the results of uncommon transactions. Uncommon transactions stay that way. The trade-off is that standards are less certain than rules.

Abstract:
The tax law frequently distinguishes or draws lines between economically similar activities. For example, the tax law draws lines between selling and holding, debt and equity, corporations and partnerships, and independent contractors and employees. Policymakers typically have discretion to shift the boundaries between these categories but cannot eliminate the categories or make the treatments of the categories consistent.

Where a given line is drawn will have efficiency effects. This paper provides a model of efficient line drawing and gives several applications. The model shows that, generally, lines should be drawn so that a transaction or item is taxed like its closest substitutes. Moreover, the benefit of keeping substitutes together often outweighs the negative effect of raising an inefficient tax. For example, if a new financial instrument is a better substitute for equity than for debt, it should be classified as equity notwithstanding the resulting increase in the inefficient corporate tax.

Abstract:
This paper examines the Clinton Administration proposal to treat a short against the box (and other similar transactions) as a realization event. The paper draws three conclusions. First, traditional analysis, for example that based on Haig-Simons notions of income or horizontal and vertical equity, cannot resolve whether the proposal would produce a net welfare gain. Second, the proposal might produce an efficiency gain, although substantial (and difficult) empirical work is needed to verify the claim. In particular, the proposal would increase realizations but also increase the cost of lock-in. The size of these changes must be determined and translating these changes into social welfare costs requires better models of stock trading than are currently available. Third, the administrative problems with the proposal (or any proposal of this sort) are substantial and raise questions about whether it should be adopted at all.