Category: Tax

Scholarship and Mid-Career Self-Assessments: A Brief Reflection on Simkovic’s What Can We Learn from Credit Markets?

Chris J. Walker has written a very helpful series of posts for young professors on “how to become a voice in one’s field.” The last addressed one of the hardest issues: “Am I Asking the Right Questions?” Academic freedom at a professional school comes with serious responsibilities: to choose field(s), to apply methodology well, and to try to establish the importance of one’s findings among one’s peers and (increasingly) among educated publics, as an engaged academic. Both Walker and Michael Rich offer wise perspectives on the dilemmas that inevitably come up during thoughtful reflection on these responsibilities, focusing on a process of discernment.

I also think that we can learn a great deal from the content of successful scholars’ inquiry. Usually, researchers only undertake this type of self-reflection when applying for jobs and preparing research agendas (a mostly private process), or at the end of a career (when a long list of accomplishments may seem too daunting to be relatable to younger peers). But winners of the ALI Young Scholars Medal appear to get invited to give a public talk on their work at an earlier stage of inquiry. Mike Simkovic (whose work I’ve previously praised here) gave such an address in May.

The talk is focused on the questions that led Simkovic to research credit markets. His work helped explain some puzzling aspects of personal finance–for example, why harsh restrictions on bankruptcy imposed in the mid-2000s did not lead to a cheapening of credit. His findings are revealing: consolidation in the credit card industry, as well as confusing contractual terms, helped dominant firms keep the resulting profits, rather than compete them away. As of 2016, even The Economist has caught up to this challenge to laissez-faire orthodoxy–but at the time it was made, complacent assumptions about market efficiency were dominant.

From that inquiry, Simkovic describes a chain of puzzles that led him to challenge widely held preconceptions in corporate, education finance, and tax law. It’s an engaging documentation of a particularly fruitful and insightful trajectory in inquiry.

I recently proposed a paper to the MLA’s annual conference entitled “Beyond the False Certainties of Impact Factors, Altmetrics, and Download Counts: Qualitative & Narrative Accounts of Scholarship.” It arose out of my dissatisfaction with the metricization of accomplishment. As citation counts proliferate, accumulating the ersatz currency of reputational quantifications threatens to overwhelm the real purpose of research–just as financialization has all too often undermined the productive functions of the economy.

Traditional modes of assessment (including tenure letters and festschrift tributes) are an alternative form of evaluation. And an essay like Simkovic’s is an example of a type of self-evaluation that should become more popular among scholars at certain career milestones (like tenure, appointment to full professor or senior lecturer, and, say, every 5 or 10 years thenceforward.) We need better, more narrative, mid-career assessments of the depth and breadth of scholarly contributions. Such qualitative modes of evaluation can complement the quantification-driven metrics now ascendant in the academy.


Married Filing Separately

I have a question for all of our readers who are tax attorneys.  What is the point of having a separate federal tax status of “married filing separately?”

When I got married, I looked into this filing and concluded that you should do it only if: (a) you were legally separated from your spouse, or (b) you thought your spouse was crooked and did not want to sign a joint return.  Now I understand that there could be other exotic scenarios where a married couple would pay less filing separately, but I’m wondering why this category was created in the first place?  Was there some problem that Congress was trying to address?

P.S.  This is probably my first tax post in six years of blogging.

Taking Human Capital Theory Seriously: Simkovic on “The Knowledge Tax”

Graduate professional education in the US is facing a financing squeeze. Some argue that those learning to become doctors, nurses, engineers, lawyers, and the like should get no help from the federal government, because they tend to earn higher incomes than average. Others question that premise, arguing that past results of grad degrees are no guarantee of future performance. They believe that an impending wave of defaults on federal student loans will raise the cost of federal credit programs.

Nevertheless, each side argues for policy with convergent outcomes. The “grad students will be rich” camp argues for curtailing federal loans, since they believe professionals can handle the higher interest rates on the private market. The “grad students will be poor” camp wants to raise the rates on federal student loans, to build up the already hefty surpluses the government is now making, to prepare for the putative future defaults. In the eyes of both, graduate students are the undeserving recipients of government largesse.

I’m not convinced by either: the “too rich” camp fails to value professional services properly, and the “too poor” camp is relying on controversial accounting techniques. But until I read Mike Simkovic’s recent paper “The Knowledge Tax,” I’d never thought of an even more fundamental distortion at work here: tax policy. Simkovic lays out the problem with characteristic clarity, considering a hypothetical college graduate deciding on (1) attending medical school and practicing medicine; or (2) purchasing a small vacant building and converting it into rental apartments:
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UCLA Law Review Vol. 62, Issue 1

Volume 62, Issue 1 (January 2015)

Intellectual Property Law Solutions to Tax Avoidance Andrew Blair-Stanek 2
Cooperative Federalism and Marijuana Regulation Erwin Chemerinsky, Jolene Forman, Allen Hopper & Sam Kamin 74
Offshoring the Army: Migrant Workers and the U.S. Military Darryl Li 124



Inmates’ Need for Federally Funded Lawyers: How the Prison Litigation Reform Act, Casey, and Iqbal Combine With Implicit Bias to Eviscerate Inmate Civil Rights Tasha Hill 176
Proportional Voting Through the Elections Clause: Protecting Voting Rights Post-Shelby County Conner Johnston 236





The U.S. Supreme Court Should Reverse Wynne – Narrowly

Maryland State Comptroller of the Treasury v. Brian Wynne requires the Supreme Court to decide whether the U.S. Constitution compels a state to grant an income tax credit to its residents for the out-of-state income taxes those residents pay on out-of-state income.

Brian and Karen Wynne live in Howard County, Maryland. As Maryland residents, the Wynnes pay state and county income taxes on their worldwide income. Maryland law provides that its residents who pay income taxes to states in which they do not live may credit those payments against their Maryland state income tax liability. However, Maryland grants no equivalent credit under the county income tax for out-of-state taxes owed by Maryland residents on income earned outside of Maryland.

When the Wynnes complained about the absence of a credit against their Howard County income tax for the out-of-state income taxes they paid, Maryland’s Court of Appeals agreed, holding that such credits are required by the nondiscrimination principle of the Constitution’s dormant Commerce Clause. The absence of a credit against the county income tax induces Maryland residents like the Wynnes to invest and work in-state rather than out-of-state. This incentive, the Maryland court held, may impermissibly “affect the interstate market for capital and business investment.”

For two reasons, the U.S. Supreme Court should reverse. First, Wynne highlights the fundamental incoherence of the dormant Commerce Clause test of tax nondiscrimination: Any tax provision can be transformed into an economically equivalent direct expenditure. No principled line can be drawn between those tax provisions which are deemed to discriminate against interstate commerce and those which do not. All taxes and government programs can incent residents to invest at home rather than invest out-of-state. It is arbitrary to label only some taxes and public programs as discriminating against interstate commerce.

Suppose, for example, that Howard County seeks to improve its public schools, its police services, or its roads. No court or commentator suggests that this kind of routine public improvement violates the dormant Commerce Clause principle of nondiscrimination. However, such direct public expenditures, if successful, have precisely the effect on residents and interstate commerce for which the Court of Appeals condemned the Maryland county income tax as discriminating against interstate commerce: Better public services also “may affect the interstate market for capital and business investment” by encouraging current residents and businesses to stay and by attracting new residents and businesses to come.

There is no principled basis for labeling as discriminatory under the dormant Commerce Clause equivalent tax policies because they affect “the interstate market” of households and businesses. Direct government outlays have the same effects as do taxes on the choice between in-state and out-of-state activity. If taxes discriminate against interstate commerce because they encourage in-state enterprise, so do direct government expenditures which make the state more attractive and thereby stimulate in-state activity.

Second, the political process concerns advanced both by the Wynne dissenters in Maryland’s Court of Appeals and by the U.S. Solicitor General are persuasive. Mr. and Mrs. Wynne are Maryland residents who, as voters, have a voice in Maryland’s political process. This contrasts with nonresidents and so-called “statutory residents,” individuals who are deemed for state income tax purposes to be residents of a second state in which they do not vote. As nonvoters, nonresidents and statutory residents lack political voice when they are taxed by states in which they do not vote.

Nonresidents and statutory residents require protection under the dormant Commerce Clause since politicians find it irresistible to export tax obligations onto nonvoters. The Wynnes, on the other hand, are residents of a single state and vote for those who impose Maryland’s state and local taxes on them.

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Blair-Stanek on Intellectual Property Law Solutions to Tax Avoidance

My colleague Andrew Blair-Stanek has a creative and interesting new article Intellectual Property Law Solutions to Tax Avoidance, forthcoming UCLA Law Review. Check out the abstract:

Multinational corporations use intellectual property (IP) to avoid taxes on a massive scale, by transferring their IP offshore for artificially low prices. Economists estimate that this abuse costs the U.S. Treasury as much as $90 billion each year. Yet tax policymakers and scholars have been unable to devise feasible tax-law solutions to this problem. This Article introduces an entirely new solution: change IP law rather than tax law. Multinationals’ tax-avoidance strategies rely on undervaluing their IP. This Article proposes extending existing IP law so that these low valuations make it harder for multinationals subsequently to litigate or to license the IP. For example, transferring a patent for a low price to a tax-haven subsidiary should make it harder for the multinational to demonstrate the patent’s validity, a competitor’s infringement, or entitlement to any injunctions. The low transfer price should also weigh toward lower patent damages and potentially even a finding of patent misuse. Extending IP law in such ways would deter multinationals from using IP to avoid taxes. Both case law and IP’s theoretical justifications support this approach, which also has the counterintuitive benefit of encouraging the flourishing of creative professionals such as inventors and authors.

Industrial Policy for Big Data

If you are childless, shop for clothing online, spend a lot on cable TV, and drive a minivan, data brokers are probably going to assume you’re heavier than average. We know that drug companies may use that data to recruit research subjects.  Marketers could utilize the data to target ads for diet aids, or for types of food that research reveals to be particularly favored by people who are childless, shop for clothing online, spend a lot on cable TV, and drive a minivan.

We may also reasonably assume that the data can be put to darker purposes: for example, to offer credit on worse terms to the obese (stereotype-driven assessment of looks and abilities reigns from Silicon Valley to experimental labs).  And perhaps some day it will be put to higher purposes: for example, identifying “obesity clusters” that might be linked to overexposure to some contaminant

To summarize: let’s roughly rank these biosurveillance goals as: 

1) Curing illness or precursors to illness (identifying the obesity cluster; clinical trial recruitment)

2) Helping match those offering products to those wanting them (food marketing)

3) Promoting the classification and de facto punishment of certain groups (identifying a certain class as worse credit risks)

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Andrew Blair-Stanek on “IP as a New Front in the Tax Avoidance Battle”

My colleague and guest blogger Andrew Blair-Stanek is working on a fascinating new piece entitled “IP as a New Front in the Tax Avoidance Battle.” As the piece exposes, multinationals’ IP-based tax avoidance is a serious problem that IP law, scholars, and practitioners have largely ignored. The abstract and corresponding cool diagram can be found here. I will blog more about it after the piece goes up on SSRN.

Tax Havens on the Electronic Silk Road

UKTaxHavensElephantInRoomAnupam Chander could not have picked a better topic in modern political economy than the digitization of flows of commerce. The Electronic Silk Road is packed with fascinating narratives about the legal conflicts that digitization generates.

As more value becomes digitally mobile, we may be on the cusp of unprecedented regulatory arbitrage (predicated on dubiously relevant doctrines, free trade commitments, and contracts.) To his great credit, Chander offers a fair assessment of digital commerce, balancing enthusiasm for its inclusive effects with caution about the need to curb the worst abuses of multinational corporations. My question is: will there be funding available to governments who take such a regulatory agenda seriously? For example, if Amazon’s Mechanical Turk decomposes digital labor among workers on different continents, how are we to fund the (sure to be sizeable) regulatory apparatus needed to assure that basic labor, safety, and other legal obligations are honored?

Consider, for instance, the aggressive tax planning of Apple. The company uses transfer pricing and Irish subsidiaries to manipulate its tax obligations. Apple’s IP (ranging from the Apple trademark, to the copyright-protected software, to patents on the phone’s innards, to design patents that give Apple an exclusive right to use the particular “look and feel” of its phones) may, in turn, be “owned” by an Apple subsidiary in, say, Bermuda, or the Cayman Islands. When people try to criticize Apple’s suppliers’ sharp labor practices, their work is often banned from the company’s app store. Apple ensures its own iGovernance mechanisms are unitary, swift in judgment, and a near-absolute authority on many aspects of the smartphone experience of tens of millions of netizens, while taking advantage of weak and fragmented jurisdictions for tax planning purposes.
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Grassroots Campaigns to Untax the One Percent

RPMThis book, recently published by Oxford, ought to draw some comment this Fall. From its description:

Isaac Martin shows how protesters on behalf of the rich appropriated the tactics used by the Left-from the Populists and Progressives of the early twentieth century to the feminists and anti-war activists of the 1950s and 1960s. He explores why the wealthy sometimes cut secret back-room deals and at other times protest in the public square. He also explains why people who are not rich have so often rallied to their cause.

For anyone wanting to understand the anti-tax activists of today, including notable defenders of wealth inequality like the Koch brothers, the historical account in Rich People’s Movements is an essential guide.

As Ezra Klein notes, for many, “opposition to taxes has nothing to do with policy. It has nothing to do with the economy. It’s religion. It’s dogma. It’s identity.” Martin’s scholarly work may help explain this development.