Be Careful What You Wish For? Reducing Inequality in the 21st Century

Stanford historian Walter Scheidel’s The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century (Princeton Univ. Press, 2017), is, in some respects, the anti-Piketty. Scheidel accepts Piketty’s view that inequality tends to grow over time, but adds a crucial caveat that runs directly opposite to Piketty’s optimistic proposals. Scheidel argues that the historical record demonstrates that inequality can only be reduced by violent means. Therefore, the Piketty proposals to reduce inequality peacefully are unrealistic, and Scheidel concludes his book by arguing that we should accept inequality as the price of peace: “All of us who prize greater economic equality would do well to remember that with the rarest of exceptions, it was only ever brought forth in sorrow. Be careful what you wish for.” This review will first summarize Scheidel’s thesis and the evidence for it (part 2). It will then argue that the twentieth-century history of the United States shows that in fact inequality can be reduced by peaceful means, even though such reductions are not easy to achieve and usually require bipartisan consensus (part 3). Next, the review will address why the Great Recession of 2008-9 did not lead to a reduction in inequality, unlike the Great Depression (part 4). Finally, the review will ask what can be done, and propose certain steps that may be more achievable than Piketty’s proposals (part 5)

Be Careful What You Wish For? Reducing Inequality in the Twenty-First Century

A review of Walter Scheidel, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century

Bridging the Red-Blue Divide: A Proposal for U.S. Regional Tax relief

The United States is the only large federal country that does not have an explicit way to reduce the economic disparities among more and less developed regions. In Germany, for example, federal revenues are distributed by a formula that takes into account the relative level of wealth of each state (the so-called Finanzausgleich, or fiscal equalization). Similar mechanisms are found in Australia, Canada, India, and other large federal countries. The United States, on the other hand, has no such explicit redistribution. Each state is generally considered equal and sovereign and the federal government does not distribute revenues to equalize the states’ spending capacity. While the overall impact of the federal tax and transfer system may be to shift revenues from richer to poorer states, this is not openly acknowledged, and to the extent it is discussed in the literature, it is generally condemned as unfair to the states that send more revenues to Washington than they get back in federal transfer payments. Nor is it politically likely that the US will adopt a formal fiscal equalization mechanism, because unlike Germany or Canada it decisively settled the problem of secession in the Civil War and therefore does not fear a potential break-up along regional lines. This Article proceeds from the normative position that the increasing gap between the richer and poorer areas of the United States is a problem that requires federal intervention, and that the federal tax system can play a role in that intervention. There is increasing evidence of a yawning economic gap between the eastern heartland (the region between the Mississippi and the eastern slope of the Appalachians) and the rest of the U.S., which translates into higher permanent unemployment and minimum wage employment, opioid abuse, imprisonment, and premature death. This gap contributed to the political division of the country revealed in the 2016 presidential election, and needs to be addressed if we want to prevent ever further polarization. The Article first assesses past and current attempts to enact tax provisions to help disadvantaged regions in the United States. On the federal level the prime example is Internal Revenue Code (IRC) section 936, which provided tax breaks for investments in Puerto Rico. This section was widely criticized and was ultimately repealed in 1996 with a ten-year phase-out. The Article will argue that in fact the evidence shows that 936 was quite successful in creating and maintaining jobs in the territory, and that its repeal led directly to Puerto Rico’s current economic problems, which began when section 936 was finally abolished in 2006. A contrary example was IRC section 199, the domestic manufacturing deduction, which was intended to stimulate manufacturing in low-growth areas like the rust belt, but was captured by coastal industries like software and entertainment and was ultimately repealed in 2017 because it was widely conceded to be ineffective. Its replacement, the Foreign Derived Intangible Income (FDII) provision in the Tax Cuts and Jobs Act of 2017 (IRC section 250), is geared toward aiding exports by intangible intensive industries and is therefore more likely to help the richer areas where these industries are located. On the state and local level, there exists a proliferation of tax incentives, but in many cases they do not result in successful development, and they tend to confer windfalls on multinationals who would have invested in the US anyway and to favor investment in already rich cities, such as the twenty finalists and the ultimate winner on Amazon’s list of candidates for its second headquarters. The Article then takes a comparative perspective by surveying several more or less successful tax measures taken to encourage development of less developed regions, including in China and Israel. Finally, the Article develops a proposal for using federal taxes to influence multinationals to invest in poorer locations. It builds on an existing list of approved targets, namely the so-called “opportunity zones” created by the 2017 tax reform. Opportunity zones are limited to census tracts that have at least a 20% poverty rate or are below 80% of the state or city median income. An investor in an opportunity zone gets a tax break, although it is limited to gains that she has already made from other investments. The opportunity zone provisions have been widely criticized as only helping investors and not being limited to people and areas in need. We would limit our proposal to opportunity zones in the target area, i.e., between the Mississippi and the eastern slope of the Appalachians, and exclude major metropolitan zones in that area. We propose that the federal government should declare that a corporation that invests in an opportunity zone in the target area would pay no federal tax on profits from that zone. To define profits from the opportunity zone and segregate them from other profits, we suggest using a formula like the one the states use: take total corporate profit and multiply it by [(wages paid to employees in the opportunity zone divided by total wages) plus (number of employees in the opportunity zone divided by total employees)]/2. This type of formula should work to incentivize corporations to move jobs to the preferred areas. With jobs come homes, good schools and everything else the richer areas of the United States already have in abundance

Federalizing Tax Justice

The United States is the only large federal country that does not have an explicit way to reduce the economic disparities among more and less developed regions. In Germany, for example, federal revenues are distributed by a formula that takes into account the relative level of wealth of each state (the so-called Finanzausgleich, or fiscal equalization). Similar mechanisms are found in Australia, Canada, India, and other large federal countries. The United States, on the other hand, has no such explicit redistribution. Each state is generally considered equal and sovereign, and the federal government does not distribute revenues to equalize the states’ spending capacity. While the overall impact of the federal tax and transfer system may be to shift revenues from richer to poorer states, this is not openly acknowledged, and that impact is generally condemned in existing literature as unfair to the states that send more revenues to Washington, D.C., than they get back in federal transfer payments. Nor is it politically likely that the U.S. will adopt a formal fiscal equalization mechanism, because—unlike Germany or Canada—it decisively settled the problem of secession in the Civil War and therefore does not fear a potential break-up along regional lines. This Article proceeds from the normative position that the increasing gap between the richer and poorer areas of the United States is a problem that requires federal intervention, and that the federal tax system can play a role in that intervention. There is increasing evidence of a yawning economic gap between the heartland and the coasts of the U.S., which translates into higher permanent unemployment and minimum wage employment, opioid abuse, imprisonment, and premature death. This gap contributed to the political division of the country revealed in the 2016 presidential election and needs to be addressed if we want to prevent ever further polarization

Should U.S. Tax Law Be Constitutionalized? Centennial Reflections on Eisner v. Macomber (1920)

The United States Supreme Court last decided a federal income tax case on constitutional grounds in 1920a century ago. The case was Eisner v. Macomber , and the issue was whether Congress had the power under the Sixteenth Amendment to include stock dividends in the tax base. The Court answered “no” because “income” in the Sixteenth Amendment meant “the gain derived from capital, from labor, or from both combined.” A stock dividend was not “income” because it did not increase the wealth of the shareholder. Macomber was never formally overruled, and it is sometimes still cited by academics and practitioners for the proposition that the Constitution requires that income be “realized” to be subject to tax. However, in Glenshaw Glass , the Court held in the context of treble antitrust damages that the Macomber definition of income for constitutional purposes “was not meant to provide a touchstone to all future gross income questions” and that a better definition encompassed all “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” In the century that has passed since Macomber , the Court has never held that a federal income tax statute was unconstitutional. This behavior of the Court constitutes a remarkable example of American tax exceptionalism, because in most other countries income tax laws are subject to constitutional review and are frequently ruled unconstitutional. In what follows, we will first examine three examples of how income tax law is constitutionalized in other countries (Part 1). We will then look at some of the larger tax expenditures in the U.S. and ask how they would fare under constitutional scrutiny (Part 2). Finally, we will attempt to answer the question whether US income tax law should be constitutionalized, and answer in a reluctant negative (Part 3). But we will also urge Congress, which is equally charged with upholding constitutional values, to take horizontal equity more into consideration when evaluating tax expenditures

Has Tax Competition Been Curbed? Reaction to L.Ahrens, L. Hakelberg & T. Rixen

This excellent article shows that contrary to the dire predictions of many observers, tax cooperation is still possible among OECD member countries and that such cooperation can overcome the trilemma of maintaining democracy, sustaining globalization and accepting some tax competition. Specifically, the authors show that in the realm of individual tax evasion, the advent of Automatic Exchange of Information (AEol) after the financial crisis of 2008-9 has enabled OECD countries to maintain a higher level of tax on capital than was possible before the crisis. This, in turn, enabled such countries to reduce inequality and maintain the social safety net while retaining the ability to democratically set tax rates and avoiding controls on the free flow of capital. The authors correctly contrast this development with the failure so far to achieve consensus on taxing corporate profits, so that the trilemma persists in regard to that type of capital

To End Deferral as we Know It: Simplification Potential of Check-the-Box

On December 17, 1996, the Treasury Department issued final regulations under section 7701 of the Internal Revenue Code implementing the regime dubbed check-the-box, under which taxpayers can elect to be treated as corporations or as passthrough entities for U.S. tax purposes. The purpose of this article is to argue that the adoption of these regulations affords a momentous opportunity for Congress to achieve significant simplification of the notoriously complex U.S. international tax rules. Fundamentally, the adoption of check-the- box means that U.S. taxpayers will be able to elect whether or not their foreign-source active income will enjoy deferral from current U.S. taxation. This adoption of completely elective deferral, in turn, implies that one argument frequently made against the mandatory abolition of deferral - that it will be a major revenue loser - is unlikely to be true. Thus, the adoption of check-the-box provides an opportunity for Congress to go one step further and abolish deferral on a mandatory, nonelective basis, which in turn would have significant potential for simplification

The International Implications of Tax Reform

This article examines the U.S. tax consequences of the use of derivative instruments in international financing transactions. The outline focuses in large part on the inconsistent U.S. tax treatment that results &om the use of various derivative financial instruments in cross-border financing transactions and the resulting implications for U.S. withholding taxes on ordinary equity and debt investments