The Dual Subsidy Theory of Charitable Deductions

Americans contribute billions of dollars to charities on an annual basis. Charitable contributions not only represent American generosity, they also represent a form of giving that provides donors with tax relief The current literature on charitable contributions suggests that this relief plays an important role not only in decentralizing the provision of public goods, but also in helping the nonprofit sector provide public goods more efficiently than government spending. Even if these claims were indisputable, they are insufficient to justify the current scheme\u27s antidemocratic function. This Article argues that, at their core, tax-subsidized contributions are part of a nondemocratic mechanism that allows individual donors to direct public funds while bypassing majority approval. Despite the nondemocratic attributes of charitable spending, this Article recognizes the virtue of charitable spending in voicing preferences not accounted for by the majoritarian process. Therefore, while the current literature suggests that charitable tax relief represents a substance subsidy by promoting the allocation of resources toward a confined set of legislatively enumerated public goods-this Article argues that it is also a process subsidy that supplements the shortcomings of majority decision making. This dual subsidy approach leads to the inevitable conclusion that the current US. charitable tax relief scheme undermines the integrity of the majoritarian process, because it disproportionately subsidizes the process component of affluent taxpayers. To better reconcile with democratic theory, many of the scheme\u27s attributes-for example, tax subsidies to corporate philanthropy-should be reconsidered and restructured. In raising this point, this Article opens a broader debate about the proper role of majority decision making and efficiency claims in legitimizing democratic tax and spending decisions

THE QUEST TO TAX FINANCIAL INCOME IN A GLOBAL ECONOMY: EMERGING TO AN ALLOCATION PHASE

The taxation of the income derived from financial assets and transactions was always a daunting black hole in the income tax regime. In an integrated global market, tax authorities find it hard to tax financial income because of the high demand for financial investments and the mobility, fungibility, and tax-sensitivity of financial assets. Many of the current approaches to solving international tax allocation problems fail to see that financial transactions present special challenges and therefore their allocation treatment requires a special solution. The Article focuses on the most conceptually intriguing and significant problem associated with the allocation of financial income: related party income shifting. This Article argues that because it is difficult to determine the comparable market benchmark with regard to affiliated financial transactions, tax authorities should abandon the arm\u27s length standard in favor of a more unitary-formulary allocation solution when trying to source these transactions. The Article develops a unitary solution that allocates the financial income of multinational financial institutions. In doing so, it assumes an ideal reality in which a multilateral unitary agreement can easily be struck and in which there are no complex corporate structures. The justification for assuming this ideal reality is that in the context of multinational financial institutions, it is not so difficult to attain given the relatively small number of countries from where these institutions run the bulk of their operations and the unique ownership patterns of the financial industry. The Article then evaluates the unitary solution proposal, and concludes that it offers a superior alternative to the current tax treatment of multinational financial institutions. It therefore argues that tax policymakers should consider it as a relevant non-utopian alternative to current practices. On the more theoretical level, it argues that there are good policy reasons, and readiness among tax policymakers around the world, to use formulary allocation methods to allocate the income proceeds of financial income. The Article should therefore be seen as opening a broader debate on how formulary methods should be used to source income derived from mobile assets. Accordingly, it develops a necessary theoretical framework for a subsequent article that extends its current proposal to multinational enterprises that are not financial institutions, and that operate in a non-ideal reality

THE NEW POOR AT OUR GATES: GLOBAL JUSTICE IMPLICATIONS FOR INTERNATIONAL TRADE AND TAX LAW

The Article explains why international trade and tax arrangements should advance global wealth redistribution in a world of enhanced economic integration. Despite the indisputable importance of global poverty and inequality, contemporary political philosophy stagnates over the controversy of whether distributive justice obligations should extend beyond the political framework of the nation state. This stagnation results from the difficulty of reconciling liberal impartiality with notions of state sovereignty and accountability. The Article offers an alternative approach that bypasses the controversy of the current debate. It argues that international trade results in relational distributive duties when domestic parties engage in transactions with foreign parties that suffer from an endowed vulnerability—such as extreme poverty prevalent in the developing world. These relational duties differ from traditional distributive claims because they rely on actual economic relationships, rather than upon hypothetical social-contract scenarios. The Article establishes that in a competitive market, private parties cannot address these relational distributive duties by themselves, because doing so would put them at a competitive disadvantage, and argues that the only common-action solution to this systemic problem in the current global political setting is wealth transfers among states. The Article proceeds to suggest some policy implication of this normative analysis in the field of international tax law. It points out that the allocation of taxing rights is a form of wealth allocation that divides globalization\u27s revenue-proceeds among nations. As such, tax allocation arrangements should help correct international trade relationships that fail to meet relational distributive standards. This discussion stresses a point frequently neglected by both the tax and political philosophy literatures—that real-world attempts to promote a more just distribution of global wealth could greatly benefit from integrating distributive considerations in tax allocation arrangements

THE NEW POOR AT OUR GATES: GLOBAL JUSTICE IMPLICATIONS FOR INTERNATIONAL TRADE AND TAX LAW

The Article explains why international trade and tax arrangements should advance global wealth redistribution in a world of enhanced economic integration. Despite the indisputable importance of global poverty and inequality, contemporary political philosophy stagnates over the controversy of whether distributive justice obligations should extend beyond the political framework of the nation state. This stagnation results from the difficulty of reconciling liberal impartiality with notions of state sovereignty and accountability. The Article offers an alternative approach that bypasses the controversy of the current debate. It argues that international trade results in relational distributive duties when domestic parties engage in transactions with foreign parties that suffer from an endowed vulnerability—such as extreme poverty prevalent in the developing world. These relational duties differ from traditional distributive claims because they rely on actual economic relationships, rather than upon hypothetical social-contract scenarios. The Article establishes that in a competitive market, private parties cannot address these relational distributive duties by themselves, because doing so would put them at a competitive disadvantage, and argues that the only common-action solution to this systemic problem in the current global political setting is wealth transfers among states. The Article proceeds to suggest some policy implication of this normative analysis in the field of international tax law. It points out that the allocation of taxing rights is a form of wealth allocation that divides globalization\u27s revenue-proceeds among nations. As such, tax allocation arrangements should help correct international trade relationships that fail to meet relational distributive standards. This discussion stresses a point frequently neglected by both the tax and political philosophy literatures—that real-world attempts to promote a more just distribution of global wealth could greatly benefit from integrating distributive considerations in tax allocation arrangements

Who Should Decide Whether the Apple is Rotten? Tax Disclosure and Corporate Political Agency

Enron-type corporate financial accounting scandals in the beginning of the millennium have given rise to a renewed interest in corporate tax disclosure. Anecdotal evidence suggesting a connection between corporate fraud and aggressive tax planning has motivated academics and policymakers to reconsider tax disclosure as a way to monitor corporate governance and limit tax avoidance. This article offers a different perspective on tax disclosure, tying it to the broader question of how policymakers should monitor the political impact of corporate business activities. The article claims that policymakers should view corporations’ tax planning strategies as part of a broader corporate political impact on social issues. This impact results from the genuine difficulty of bifurcating corporate business decisions from their political ones. This difficulty is a result of many judgment calls required in such decisions, which relate to individuals’ moral and political preferences. Tax planning is one of these mixed business-political decisions, and the article advances the notion that policymakers should analyze tax planning not only as a law enforcement issue, but also through corporate governance lenses. To establish this inquiry, the article explains why the investor-shareholder relationship gives rise to political agency problems, which neither traditional nor critical corporate law literatures recognize. It then demonstrates how the costs associated with this type of agency relationship could be reduced via disclosure of information about the impact of corporate activities on issues of political concern. The article uses insights from financial markets theory to explain how disclosure of non-financial information would help to better align corporate actions with the political preferences of shareholders, despite shareholder rational passivity and apathy. It is then illustrated, through the Apple case, how policymakers can use the theoretical conclusions reached through this analysis to formulate a real world policy proposal with respect to corporation tax planning. Through its use of a wide range of interdisciplinary resources, this article aims to reformulate the multi-layered inquiry over the benefits and costs associated with corporate tax disclosure

Taxing Cash

The cash economy enables, or at least significantly simplifies, many tax evasion schemes. This is not surprising; after all, cash transactions can go unreported and therefore remain concealed from both regulators and creditors. The tax collector operates as both a creditor and a regulator, which means that cash transactions impose negative externalities on tax collection and administration. These externalities could be corrected through a relatively simple Pigovian tax that would be imposed, prior to cash-mediated transactions, every time cash was withdrawn from the financial system. Tax authorities would not collect any tax when cash would be deposited. This article argues that such a cash tax would make tax collection both easier and more accurate. If a cash tax were imposed, most of the legitimate economy would shift to non-cash exchange methods. In such a setting, cash transactions would be effectively limited to two categories: low-value transactions and transactions that benefit from the anonymity associated with cash. Transactions associated with tax evasion and other types of criminal activities likely comprise most of the latter category. Hence, because cash would comprise a relatively small portion of the formal economy’s turnover, there are good reasons to believe that cash owners operating in the underground economy would be unable to roll over most of the cash-tax burden. This means that most of the cash-tax incidence would fall on those who use cash to engage in tax evasion or other forms of unreported behaviors. Such a cash tax would therefore reduce the lack-of-tax benefit associated with cash-based tax evasion along with the inequities and inefficiencies associated with it. Furthermore, it would allow policymakers to comprehensively address the externalities associated with unreported transactions in the cash economy

The Quest to Tax Interest Income: Stages in the Development of International Taxation

The Article offers a new perspective on the way international income tax has developed from its nascency, 85 years ago, to the present day. Its main claim is that, due to the lack of a clear normative tax agenda, trade considerations unduly eroded the income tax base. Such trade considerations highlight the importance of reducing tax obstacles on trade and investment to liberalize and integrate international markets. These considerations penetrated international income tax discourse during the Cold War period, when liberalizing trade was part of a broader western agenda to establish dominance through the liberalization of international markets. The Article demonstrates that the tax allocation conventions developed in the periods prior to the Cold War—and thereafter—were unable to counter successfully an endemic trend of tax erosion. To establish this claim, the Article frames three novel chronological phases and shows how different themes governed each phase. It then connects each theme and the relevant parallel global geo-political occurrences of that phase. The Article presents an original macro perspective of the development of international taxation sourcing conventions. It encapsulates this broad topic by focusing on a number of key issues arising from the conventions regarding the allocation of interest income. Access to foreign capital markets and foreign lenders is paramount to economic growth. Therefore, the tax treatment of interest income has always been a pivotal and controversial issue. The centrality of interest income allocation conventions and their modifications over the years make them a good proxy for understanding the more general evolution of international tax law. Since tax law research is the art of tying big themes with devils hiding in the details, the Article engages in an in-depth critical analysis of a number representative interest allocation mechanisms to demonstrate the dynamics of the income tax erosion it identifies. The Article builds on its historical analysis to open a wider discussion over the proper allocation method for taxing financial income. The mobility and tax sensitivity of capital assets make them the subject of tax planning (by taxpayers) and tax competition (by sovereigns). This renders the analysis important and interesting, but also more multilayered and difficult. The Article concludes with a discussion of the principled normative pillars of any future reform in the allocation of tax revenues arising from financial income. This discussion promotes the notion that, at least in the case of financial transactions within multinational enterprises, there is a need for an immediate strategic shift, if tax authorities wish to maintain the integrity of the corporate income tax

A Comprehensive Solution for a Targeted Problem: A Critique of the EU’s Home State Taxation and CCCTB Initiatives

This Article examines the European Commission\u27s Home State Taxation and CCCTB initiatives. It argues that both proposals undermine the long-term objective of attaining a consolidated European corporate tax regime. It suggests an alternative strategy, which offers a comprehensive formulary-tax-allocation-solution in one of the hard to tax sectors, such as the financial sector. This strategy requires more efforts and political risk-taking, but would better promote the long-term objective of a consolidated EU corporate tax regime. An edited version of this article is scheduled to be published in a future issue of European Taxation (an IBFD publication)

The Quest to Tax Interest Income: Stages in the Development of International Taxation

The Article offers a new perspective on the way international income tax has developed from its nascency, 85 years ago, to the present day. Its main claim is that, due to the lack of a clear normative tax agenda, trade considerations unduly eroded the income tax base. Such trade considerations highlight the importance of reducing tax obstacles on trade and investment to liberalize and integrate international markets. These considerations penetrated international income tax discourse during the Cold War period, when liberalizing trade was part of a broader western agenda to establish dominance through the liberalization of international markets. The Article demonstrates that the tax allocation conventions developed in the periods prior to the Cold War—and thereafter—were unable to counter successfully an endemic trend of tax erosion. To establish this claim, the Article frames three novel chronological phases and shows how different themes governed each phase. It then connects each theme and the relevant parallel global geo-political occurrences of that phase. The Article presents an original macro perspective of the development of international taxation sourcing conventions. It encapsulates this broad topic by focusing on a number of key issues arising from the conventions regarding the allocation of interest income. Access to foreign capital markets and foreign lenders is paramount to economic growth. Therefore, the tax treatment of interest income has always been a pivotal and controversial issue. The centrality of interest income allocation conventions and their modifications over the years make them a good proxy for understanding the more general evolution of international tax law. Since tax law research is the art of tying big themes with devils hiding in the details, the Article engages in an in-depth critical analysis of a number representative interest allocation mechanisms to demonstrate the dynamics of the income tax erosion it identifies. The Article builds on its historical analysis to open a wider discussion over the proper allocation method for taxing financial income. The mobility and tax sensitivity of capital assets make them the subject of tax planning (by taxpayers) and tax competition (by sovereigns). This renders the analysis important and interesting, but also more multilayered and difficult. The Article concludes with a discussion of the principled normative pillars of any future reform in the allocation of tax revenues arising from financial income. This discussion promotes the notion that, at least in the case of financial transactions within multinational enterprises, there is a need for an immediate strategic shift, if tax authorities wish to maintain the integrity of the corporate income tax