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

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)

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

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

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

Passport to Toledo: Cuno, the World Trade Organization, and the European Court of Justice

The purpose of this article is to try to place the debate about Cuno v. DaimlerChrysler in a broader perspective by connecting it with the overall discussion of harmful tax competition. It discusses two hypothetical scenarios under which the city of Toledo, Ohio, is (a) a separate country and (b) a member state of the European Union. If the first hypothetical were true, the tax incentives offered by Toledo would violate the rules of the World Trade Organization; if the second hypothetical were true, the tax incentives would also violate the Treaty of Rome, as interpreted by the European Court of Justice. The reason for those outcomes is that tax incentives like those at issue in Cuno violate well established policies of both the WTO and the ECJ designed to prevent harmful tax competition from skewing trade and investment patterns. Thus, consideration of the two hypotheticals may shed some light on the policy issues at stake inCuno, as well as on the desirable outcome if the Supreme Court were to decide Cuno on the merits

Just Say No: Corporate Taxation and Corporate Social Responsibility

This article will address the question whether publicly traded US corporations owe a duty to their shareholders to minimize their corporate tax burden in any way that they may be able to get away with from a purely legal perspective. First, however, to render the subsequent discussion a bit more concrete, I will describe a recently unveiled case study of corporate tax aggressiveness

Overcoming Political Polarization: Federal Funding of Education Is the Key

The best way of overcoming political polarization in the US (the last two elections were both decided by fewer than 100,000 votes in WI, MI, PA (2016) and WI, AZ, GA (2020)) is to reduce disparities in education. But how can we do that? The basic problem arises from the US system of funding K-12 education from property taxes. While the picture above refers to college education, it is K-12 education that determines both college admissions and college readiness. Thus, the only viable solution is a federal solution. As President Nixon proposed in 1972, the United States should adopt an “Education Value Added Tax” (E- VAT) and use the revenues to equalize per student school funding across the country, as well as funding universal free public pre-K programs (such as the ones instituted by Mayor DeBlasio in NYC) and universal free public colleges for in-state residents (as used to be the case in California)