Probabilistic Compliance

Uncertain legal standards are pervasive but understudied The key theoretical result showing an ambiguous relationship between legal uncertainty and optimal deterrence remains largely undeveloped, and no alternative conceptual approaches to the economic analysis of legal uncertainty have emerged

Revealing Choices: Using Taxpayer Choice to Target Tax Enforcement

People pay their taxes for many different reasons. Some choose to game the system, paying only when the cost of noncompliance outweighs its benefits. Others comply out of habit, a sense of duty or reciprocity, a desire to avoid feelings of guilt or shame, and for many other reasons. Our tax enforcement system has ignored this variety of taxpaying motivations for decades. It continues to rely primarily on audits and penalties, at least where information reporting and withholding are impossible. Fines and audits deter those rationally playing the tax compliance game, but are wasteful or even counterproductive when applied to others. The shortcomings of the current one-size-fits-all approach to tax enforcement are well understood. They also appear to be insurmountable. This Article argues that it is possible to design a more tailored regime. The idea is to separate taxpayers based on their taxpaying motivations by creating two different enforcement regimes and inducing taxpayers to choose one when they file their annual returns. With this separation accomplished, the government can target enforcement by matching enforcement policies to taxpayer types. Those who choose to game the system will be deterred by higher penalties in one regime. Everyone else will be induced to comply by cooperative enforcement measures in the other. If successful, separation and targeted enforcement will improve tax compliance without raising its social cost, or keep the level of compliance unchanged while making tax administration more efficient

Distributional Arguments, In Reverse

This Article contends that the government should consider – rather than ignore – distributional consequences both in the design of legal rules and during legal transitions. This does not mean that the distributional effect of every legal rule should be measured and taken into account in the rule’s design. But if the likely distributional effects are unintended, large, and objectionable, if the efficiency of the legal rule is doubtful, if the compensating tax-and-transfer adjustment is not forthcoming (or has not occurred), policymakers should take distribution into account. One way of doing so is to choose among several alternative legal rules of questionable efficiency the one with better distributional consequences. Another is to slow the pace of legal change in certain cases. This Article also does not suggest that every transitional loss should be reimbursed. But if losses are large and unforeseeable, if private risk-mitigation mechanisms are unavailable, the government should step in. Enacting a broad-based transitional assistance program for low-skill workers and replacing our complex, obscure, state-specific social safety net with a simpler, transparent, nationally uniform one would go a long way toward mitigating the losses discussed here

Relational Tax Planning Under Risk-Based Rules

Risk-based rules are the tax system\u27s primary response to aggressive tax planning. They usually grant benefits only to those taxpayers who accept risk of changes in market prices (market risk) or business opportunities (business risk). Attempts to circumvent these rules by hedging, contractual safeguards, and diversification are well-understood. The same cannot be said about a very different type of tax planning. Instead of reducing risk directly, some taxpayers change the nature of risk. They enter into informal, legally unenforceable agreements with contractual counterparties that are designed to eliminate market or business risk entirely. The new uncertainty these tax planners inevitably accept, however, is the risk (counterparty risk) that the counterparties will violate the implicit agreements and betray taxpayers\u27 trust. A deliberate substitution of counterparty risk for market or business risk is what this Article calls relational tax planning. The Article offers an economic analysis of different risks and considers two responses to the relational tax planning problem. The analysis suggests that business risk is superior to both market and counterparty risks. Counterparty risk is the most complex of the three. In addition to risk-bearing losses produced by all risks, it reduces transaction costs of future exchanges between relational tax planners, but only if they manage to overcome bargaining obstacles caused by opportunism and asymmetric information. These insights suggest two very different responses. A sweeping reform will allow – and even encourage – taxpayers to engage in relational tax planning, but will also ensure that counterparty risk they incur is sufficiently high. If only incremental improvements are pursued, courts should increase their scrutiny of relational tax planning involving extensive dyadic business relationships and interactions based on social norms

Yes, Tax the Rich — and Also the Merely Affluent

Most Americans believe that economic inequality is too high, and many think that higher taxes are the answer. There is some disagreement about who should pay higher taxes, but there is broad agreement about who should not. At least since the heyday of the Occupy Wall Street movement, \u27We Are the 99 Percent\u27\u27 has been the dividing line. “Those in the 1 percent are walking off with the riches, but in doing so they have provided nothing but anxiety and insecurity to the 99 percent,” explained Nobel laureate Joseph Stiglitz in his 2012 book The Price of Inequality. The “main fault line in the American society is ... between the 1 percent and everybody else,” insisted celebrated economists Emanuel Saez and Gabriel Zucman in their book The Triumph of Injustice, published amid the 2020 presidential campaign. Dramatic wealth tax proposals by Democratic presidential candidates Senators Bernie Sanders and Elizabeth Warren, chair of the tax-writing committee Senator Ron Wyden, and even an income taxation plan by Representative Alexandria Ocasio-Cortez do not come close to hiking taxes on anyone below the 1 percent threshold. The same is true of the suggestions by numerous tax academics considering how to tax the rich

Is There a Future for Future Claimants After \u3ci\u3eAmchem Products, Inc. v. Windsor\u3c/i\u3e?

In September 1990, the Chief Justice of the U.S. Supreme Court appointed an Ad Hoc Committee on Asbestos Litigation in response to what was widely perceived as a \u27failure of the federal court system to perform one of its vital roles in our society.\u27 Less than a year later, the Judicial Panel on Multidistrict Litigation transferred all untried asbestos cases to the eastern district of Pennsylvania for pretrial proceedings. In January 1993, these proceedings produced a global settlement class action of historic proportions, which the district court eventually approved in August 1994. In May 1996, in Georgine v. Amchem Products, Inc., the Third Circuit vacated the settlement and remanded the case to the district court with directions to decertify the class. One month later, the Fifth Circuit affirmed a $1.535 billion global settlement between Fibreboard Corp. and a class virtually identical to that decertified by the Third Circuit. In June 1997, the Supreme Court decided Amchem Products, Inc. v. Windsor, in which it affirmed the Georgine decision, and vacated the Fifth Circuit settlement. Decades of asbestos litigation, years of effort by the most sophisticated members of the mass tort bar, and millions of dollars in transaction costs were rendered moot by the same Court that had recognized the crisis and called for an extraordinary response seven years before

Relational Tax Planning Under Risk-Based Rules

Risk-based rules are the tax system\u27s primary response to aggressive tax planning. They usually grant benefits only to those taxpayers who accept risk of changes in market prices (market risk) or business opportunities (business risk). Attempts to circumvent these rules by hedging, contractual safeguards, and diversification are well-understood. The same cannot be said about a very different type of tax planning. Instead of reducing risk directly, some taxpayers change the nature of risk. They enter into informal, legally unenforceable agreements with contractual counterparties that are designed to eliminate market or business risk entirely. The new uncertainty these tax planners inevitably accept, however, is the risk (counterparty risk) that the counterparties will violate the implicit agreements and betray taxpayers\u27 trust. A deliberate substitution of counterparty risk for market or business risk is what this Article calls relational tax planning. The Article offers an economic analysis of different risks and considers two responses to the relational tax planning problem. The analysis suggests that business risk is superior to both market and counterparty risks. Counterparty risk is the most complex of the three. In addition to risk-bearing losses produced by all risks, it reduces transaction costs of future exchanges between relational tax planners, but only if they manage to overcome bargaining obstacles caused by opportunism and asymmetric information. These insights suggest two very different responses. A sweeping reform will allow – and even encourage – taxpayers to engage in relational tax planning, but will also ensure that counterparty risk they incur is sufficiently high. If only incremental improvements are pursued, courts should increase their scrutiny of relational tax planning involving extensive dyadic business relationships and interactions based on social norms