Scrubbing the Wash Sale Rules

Loss limitations are an ugly but inevitable feature of any realization-based income tax. In essence, because the system mismeasures gains, it also has to mismeasure losses. Otherwise, the timing option inherent in the realization rule would allow taxpayers to defer gains (thereby reducing the tax\u27s present value) while accelerating losses (thereby preserving the deduction\u27s present value). The wash sale regime of Section 1091 is one of our system\u27s most important brakes on the timing option. Yet it is only a slight exaggeration to say that compliance with the regime is voluntary for very wealthy taxpayers – or, at least, for those who are willing to take aggressive positions. In response, this Article flags seven glitches in the regime that, at least arguably, permit perfect end runs. As used here, this phrase refers to strategies in which taxpayers can deduct losses while effecting virtually no change in their economic position. The essential point is that, if we are going to have a wash sale regime, these end runs should not be allowed. This Article also takes a more controversial position: Losses should still be deferred – even when taxpayers make meaningful changes in their economic position – as long as they keep material elements of their old return. The policy goal here is to ensure that, on average, taxpayers expect losses to be deferred as long as gains. This Article proposes concrete modifications in the regime to implement this goal, while also offering a caveat: The case for a strong wash sale regime is less strong if the regime can never be tough enough to stop loss harvesting. If so, other constraints on the timing option may be preferable, including accelerated timing for gains or a broader capital loss regime

Tax Constraints on Indexed Options

Indexed stock option grants reward executives for outperforming a benchmark, such as the market as a whole or competitors in the same industry. These options offer superior incentives by limiting the influence of factors beyond an executive\u27s control, such as general market and industry conditions. Yet indexed options are almost never used. Professor Saul Levmore seeks to explain this puzzle with norms. This comment on his article argues that tax plays a larger role in this puzzle than he acknowledges, although tax is not a complete explanation. Accounting and Professor Levmore\u27s norms-based account are then briefly considered

Subsidizing Charitable Contributions: Incentives, Information, and the Private Pursuit of Public Goals

The charitable deduction has enjoyed relatively little support in the legal academy. Many commentators have asked what it adds to the tax system and, as critics such as Stanley Surrey and Paul McDaniel have observed, the deduction obviously does not itself collect tax revenue. Defenders respond that the deduction helps to measure income and to keep taxpayers from inefficiently substituting leisure for work, but these points are, of course, contested. Instead of revisiting debates about what the deduction adds to the tax system, this Article focuses on the broader question of what it adds to the pursuit of public goals. The deduction – and any other government subsidy that matches charitable contributions through the tax system (here called subsidized charity ) – enlists private individuals to pursue public goals in a somewhat unique manner. While in other settings the government delegates implementation but still specifies the goal to be pursued, charitable donors are allowed to select the goal as well. Is it desirable to pursue public goals in this way

Tax and Corporate Governance: The Influence of Tax on Managerial Agency Costs

This chapter of the Oxford Handbook on Corporate Law and Governance canvasses a broad range of ways that tax influences managerial agency costs, focusing especially on the United States. In doing so, this chapter has two goals. The first is to help corporate law experts target managerial agency costs more effectively. The analysis here flags when tax is likely to exacerbate agency costs, and when it is likely to mitigate them. Armed with this information, corporate law experts have a better sense of how vigorous a contractual or corporate law response they need. In some cases, a change in the tax law may also be justified. This chapter’s second goal, then, is to enhance our understanding of tax rules, shedding light on a set of welfare effects that are important but understudied. After all, tax policy is more likely to enhance welfare if policymakers weigh all possible welfare effects, including managerial agency costs. Overall, the U.S. tax system’s record in influencing agency costs is not encouraging. After all, a tax system’s priority is not to reduce agency costs, but to raise revenue efficiently and fairly. Government tax experts do not usually have the expertise or motivation to tackle corporate governance problems. Tax also is a poor fit because it typically applies mandatorily and uniformly, while responses to agency cost should be molded to the context. For example, promoting stock options or leverage will be valuable in some settings, but disastrous in others. There also are political hurdles to be overcome. Accordingly, when tax rules target agency costs, the results often are poorly tailored or even counterproductive. Even so, the effects are not all bad. On the positive side of the ledger, U.S. tax rules encourage performance-based pay, albeit in blunt ways. In addition, by taxing intercompany dividends, the U.S. keeps block-holders in one firm from indirectly controlling other firms. U.S. tax rules also encourage leverage, which usually (but not always) mitigates managerial agency costs. Likewise, some tax rules favor long-term ownership, which can motivate shareholders to monitor management more carefully. The need to disclose financial information on a corporate tax return can also discipline management. Discouraging the use of offshore accounts and off-balance sheet entities can keep managers from cheating shareholders, as well as the fisc. On the other side of the ledger, U.S. tax rules can be a reason (or excuse) for flawed pay. Managers also can use tax as a pretext to retain earnings, and also to oppose takeovers that put their jobs at risk. Tax also can be invoked to justify “empire building” acquisitions as well as hedging, each of which appeals more to undiversified managers than to diversified shareholders. U.S. tax rules also encourage firms to incorporate offshore or to use pass-through entities, even though these steps can weaken shareholders’ corporate law rights

Fiscal Policy in an Era of Austerity

We face a time of stagnant economic growth, severe unemployment, massive budget deficits, and an increasingly competitive global economy. These daunting challenges are the legacy of a number of unwise policy decisions in both the public and private sectors. Although the good news is that unsound policies can be changed, the bad news is that no single step will do the trick. It is a challenge to rely on monetary policy when interest rates are near zero. There also is uncertainty – and a heated debate among economists – about the effectiveness of a Keynesian stimulus. One thing we know is that a stimulus is quite difficult to execute effectively. For example, it is a challenge to identify shovel ready projects that contribute to long-term economic growth, particularly on short notice. There is no uncertainty, though, about the need to address a broad range of specific problems contributing to our economic woes. We have to promote economic growth and fiscal stability over the long term. To do so, we should reform our housing and mortgage markets, our entitlement programs, our tax code, and much more. A short Article for a special issue cannot delineate all the challenges Congress is facing or provide definitive guidance about how to address them. As an illustrative example, this Article emphasizes the perils of maintaining the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD) in a competitive global economy. Cutting our corporate tax rate would encourage businesses to invest and hire more employees, while also reducing incentives to engage in wasteful tax planning and to shift taxable income and jobs overseas

Foreword

I would like to congratulate the editors and staff of the Columbia Journal of Tax Law on their inaugural edition. It is very exciting for me to participate in the birth of a new journal in an area of such importance to financial and economic policy

Border Adjustments and the Conservation of Tax Planning

This article is based on Schizer’s keynote address at the 17th annual NYU-KPMG Tax Symposium on March 10. In this article, Schizer argues that U.S. corporate and shareholder taxes need to be reformed, and the corporate rate should be much lower. In reforming this dysfunctional regime, according to Schizer, Congress should keep both of these taxes as a form of built-in redundancy; if one tax is avoided, the other can still be collected. More generally, Congress should be wary of Utopian solutions. Tax reform is more likely to change tax planning than to eliminate it entirely, Schizer concludes. For instance, although border adjustments would foreclose some strategies, they would encourage others

Energy Subsidies: Worthy Goals, Competing Priorities, and Flawed Institutional Design

The United States uses on targeted subsidies for both green energy and hydrocarbons. These subsidies pursue worthwhile goals. But unfortunately, many have design flaws that make them less effective or even counterproductive. The goal of this Article is to show how to do better. Specifically, this Article focuses on three sets of issues. First, there often is tension between our environmental and national security goals. Unfortunately, the economics literature on energy largely ignores these trade-offs by omitting national security from the analysis. This Article takes issue with this approach and suggests ways to manage these trade-offs. Second, this Article argues that subsidies are a flawed way to deal with these costs, and shows that Pigouvian taxes (or tradeable permits) are better alternatives. Third, if Congress is stuck with subsidies for political reasons, this Article offers a number of ways to improve them