Providing a Corrective Subsidy to Insurers for Success in Reducing Traffic Accidents

Recipient of 2010 John M. Olin Law and Economics Priz

FATCA, CRS, and the Wrong Choice of Who to Regulate

FATCA and CRS have a major flaw that enables tax evaders to avoid reporting of their offshore financial assets. This noncompliance opportunity stems from the fact that many private entities are classified under FATCA and CRS as “financial institutions” (“FIs”), and as such these entities are required to report their beneficial owners. Where a tax evader holds financial assets through a private entity that he or she owns and manages, it is unlikely that this entity will report its owner to the tax authorities. At the same time, banks and other FIs that maintain the financial accounts of such entities are not required to report these entities’ beneficial owners. Therefore, to avoid reporting, tax evaders can simply hold financial assets through private entities that are classified as FIs. This noncompliance opportunity is a result of a wrong choice of who to regulate. The drafters of FATCA and CRS decided to impose obligations on many private entities to report their beneficial owners, instead of imposing these obligations on banks and other FIs that maintain the financial assets of such entities. This policy also results in higher compliance costs for compliant taxpayers, and larger distortions and deadweight loss. Thus, it benefits tax evaders and harms compliant taxpayers. This Article proposes solutions that the U.S. Treasury and the OECD should consider. Building on this analysis, this Article explores a general question of regulatory design: how to choose which group of agents should be required to satisfy a regulatory obligation where that obligation can be imposed on one of two or more alternative groups of agents. When making this decision, the designers of the regulation should consider the cost-effectiveness of compliance, the potential distortions, and the likelihood of noncompliance for each of the alternative groups

Can Taxes Mitigate Corporate Governance Inefficiencies?

Policymakers have long viewed tax policy as an instrument to influence and change corporate governance practices. Certain tax rules were enacted to discourage pyramidal business structures and large golden parachutes, and to encourage performance-based compensation. Other proposals, such as imposing higher taxes on excessive executive compensation, have also attracted increasing attention. Contrary to this view, this Article contends that the ability to effectively mitigate corporate governance inefficiencies through the use of corrective taxes is very limited, and that these taxes may cause more harm than benefit. There are a few reasons for the limited effectiveness of corrective taxes. Importantly, the same conditions that give rise to corporate governance problems also undermine the effectiveness of corrective taxes. Poorly governed firms are more likely to incur a higher tax without changing their practices that benefit their managers. Where the same corporate governance practices are harmful in some situations and beneficial in others, imposing tax is unlikely to be optimal. Corrective taxes are unlikely to be superior to other forms of regulation where the legislature knows what governance terms are optimal, or where the legislature cannot assess the negative externalities. This Article also examines the effects of general tax rules on corporate governance. The impact of general tax rules and corrective taxes on corporate governance should be carefully considered when designing a tax reform

Should the United States Adopt CRS?

The United States\u27 one-sided approach to tax transparency might lead to an unprecedented clash with the European Union (EU) in the near future. In light of the EU\u27s deadline for the United States, the U.S. Treasury and Congress should urgently engage in a discussion on whether the United States should adopt the Common Reporting Standard (CRS) for automatic exchange of financial account information. A recent report from the U.S. Government Accountability Office considered this issue and did not recommend adopting CRS. This Essay discusses the contents of the report, as well as important considerations that were left out of the report

Targeting Tax Avoidance Enablers

The Panama Papers, the Paradise Papers, and the Pandora Papers have exposed how tax advisors, lawyers, financial institutions, and other intermediaries have helped the world’s economic elites hold their wealth through corporations and trusts organized in tax havens. These professional enablers are frequently located in a country other than that of the relevant taxpayers. This means that the tax avoidance enablers are often out of the reach of the victim governments. How can a government counter the activities of professional enablers located in other countries? This has proven to be a formidable challenge. This Article proposes a novel solution: a new international reporting standard, referred to as Global Mandatory Disclosure Rules (GMDR), which will impose reporting obligations on intermediaries assisting taxpayers with designing and implementing cross-border tax schemes. This proposal builds on the legal mechanisms currently deployed in several countries. Mandatory disclosure rules (MDRs), which require that intermediaries report their clients’ tax schemes, were introduced in the United States in the 1980s. Since then, MDRs have been adopted in several countries as domestic measures targeting local tax avoidance enablers and their clients. In recent years, the European Union and the Organization for Economic Cooperation and Development have introduced multilateral MDRs that focus on certain crossborder arrangements. Drawing upon these reporting regimes, this Article proposes GMDR as a comprehensive standard. GMDR is a missing piece in the global tax transparency framework which could close gaps in other international tax reporting standards. This Article explains the need for GMDR, explores the relevant design options, and proposes an implementation strategy. As GMDR could be an indispensable tool in the international effort to curb cross-border tax abuse, this proposal deserves serious consideration