Taxation

Erin Adele Scharff

Cities are once again on the rise and have become the site of major public debates, from income inequality and immigration policy to where and how Americans should live. While municipal leaders are often eager to fill the void in political leadership left by Congress and state elected officials, they are often hamstrung by state home rule laws, which define the powers states grant to municipalities. These laws limit, among other things, municipal taxing authority. Recently, local government scholars have wrestled with whether and how to grant municipalities more fiscal authority, but such scholarship has not provided a unified theory of municipal taxing authority.

This Article considers in detail whether and how to expand city taxing authority. It argues that state law should grant municipal governments “presumptive taxing authority.” This presumptive taxing authority would parallel municipal regulatory authority and be similarly subject to state preemption law. Such reform would open the door to more municipal revenue innovation, while ensuring that the state can vindicate its weighty policy interests.

Aaron M. Bernstein

In the wake of United States v. Windsor, the IRS determined that a validly married same-sex couple is married for federal tax purposes regardless of their state of residence. A same-sex spouse residing in a state that does not recognize same-sex marriage is required to file federal taxes as married under federal law but is prohibited from filing as married in-state, thereby creating incompatibility—a filing status mismatch—between her federal and state income taxes. In order to resolve this, states should not require a same-sex spouse to prepare a pro forma “unmarried” federal return for state filing purposes, as this is inefficient to administer and enforce, and creates an inequitable compliance burden on the taxpayer. Nor should states delink their base from federal income or remove from their state tax codes all references to federal tax law, as this reduces tax efficiency. Instead, states should place traditional concerns of tax efficiency and equality above narrower same-sex marriage policy objectives when crafting their tax systems. Tax efficiency and equity require that states at least permit resident same-sex married taxpayers to allocate income and deduction figures already computed for their federal returns when preparing their state returns.

Akari Atoyama-Little

Single mothers are responsible for raising one in five American children. They are disproportionately poor women of color. This Note explores the Internal Revenue Code’s provisions that, though facially neutral, disadvantage single motherhood in effect. Although the tax code’s progressivity does some work to alleviate poverty among single mothers, major income tax provisions intended to support families fail many single mothers precisely because of their low-income status. Many of the benefits go to higher-income families, who tend to be married couples. This Note argues that the tax code should do more to support single mothers. Specifically, this Note argues that the existing federal child and dependent care credit should be made refundable so that it reaches more single mothers and better functions as an incentive to procure quality care for children.

Sara Sternberg Greene

The Earned Income Tax Credit (EITC) is the largest federal antipoverty program in the United States and garners almost universal bipartisan support from politicians, legal scholars, and other commentators. However, assessments of the EITC missed an imperative perspective: that of EITC recipients themselves. Past work relies on largely unconfirmed assumptions about the behaviors and needs of lowincome families. This Article provides a novel assessment of the EITC based on original data obtained directly from 194 EITC recipients through in-depth qualitative interviews. The findings are troubling: They show that while the EITC has important advantages over welfare, which it has largely replaced, it fails as a safety net for low-income families. The problem is that the EITC provides a large windfall to families only once per year, during tax refund season. However, low-income families are particularly vulnerable to financial shocks and instability. Not surprisingly, such events rarely coincide with tax refund season. Without a fix, the EITC leaves many families on the brink of financial collapse. In the years to come, many more low-income families may file for bankruptcy or become homeless. Despite this grim outlook, this Article suggests a straightforward and promising new way to distribute the EITC that maintains the program’s advantages while also providing a more secure safety net for low-income families in times of financial shock and instability.

Joshua D. Blank & Nancy Staudt

Many people—perhaps most—want to make money and lower their taxes, but few want to unabashedly break the law. These twin desires have led to a range of strategies, such as the use of “paper corporations” and offshore tax havens, that produce sizable profits with minimal costs. The most successful and ingenious plans do not involve shady deals with corrupt third parties, but strictly adhere to the letter of the law. Yet the technically legal nature of the schemes has not deterred government lawyers from challenging them in court as “nothing more than good old-fashioned fraud.”

In this Article, we focus on government challenges to corporate financial plans—often labeled “corporate shams”—in an effort to understand how and why courts draw the line between legal and fraudulent behavior. The scholars and commentators who have investigated this question nearly all agree: Judicial decision making in this area of the law is erratic and unpredictable. We build on the extant literature with the help of a new, large dataset, and uncover important and heretofore unobserved trends. We find that courts have not produced a confusing morass of outcomes (as some have argued), but instead have generated more than a century of opinions that collectively highlight the point at which ostensibly legal planning shades into abuse and fraud. We then show how both government and corporate attorneys can exploit our empirical results and explore how these results bolster many of the normative views set forth by the scholarly and policymaking communities.

Jonathan D. Grossman

The False Claims Act (FCA) imposes severe penalties on those who commit fraud against the federal government. The statute currently requires violators to pay treble damages plus a statutory penalty of five to ten thousand dollars per violation. The goal of the statute is to deter fraud by setting punitive damages at a high level. However, the tax law, as currently interpreted by the Internal Revenue Service (IRS), blunts the force of the statute by allowing a violator to deduct a portion of an FCA damages award as a business expense. Specifically, Treasury regulations allow for the deductibility of any portion of an FCA settlement or damages award that is paid to the whistleblower, known as the “relator,” who brings suit under the FCA for the alleged fraud. This Note argues that, for reasons of efficiency and equity, the IRS should change its current position and disallow relator fee deductions.

Meredith M. Stead

Over the past several decades, Congress has turned increasingly to tax expenditures rather than to direct outlay programs to implement social welfare programs. Such a trend creates economic distortions and has proven disadvantageous to taxpayers in lower socioeconomic classes. The newest twist is in the area of disaster relief. Unprecedented before 2001, tax relief targeted to a disaster in a specific geographic region has now been established on two occasions-in the wake of the 9/11 attacks and in the aftermath of Hurricane Katrina. This Note argues that, in a disaster, both the vulnerability of lower-income taxpayers and the weaknesses of the Internal Revenue Code as an instrument for social programs are amplified. This problem was particularly acute after Hurricane Katrina. Congress should therefore reconsider the current trend toward using tax expenditures rather than direct relief in such situations, or alternately structure other relief to correct for its shortcomings.

Leandra Lederman

Virtual worlds are increasing in commercial importance. As the economic value of computer-generated spaces soars, questions of how to apply our tax law to transactions within them will inevitably arise. In this Article, Professor Leandra Lederman argues for federal income tax treatment that reflects the differences between “game worlds” and “unscripted worlds,” arguing that the former should receive more favorable tax treatment than the latter. Specifically, she argues that transactions in game worlds such as World of Warcraft should not be taxed unless the player engages in a real-market sale or exchange. By contrast, in intentionally commodified virtual worlds such as Second Life, federal income tax law and policy counsel that in-world sales of virtual items be taxed regardless of whether the participant ever cashes out.

Nancy C. Staudt, René Lindstädt, & Jason O’Connor

This Article offers a new understanding of the dynamic between the Supreme Court and Congress. It responds to an important literature that for several decades has misunderstood interbranch relations as continually fraught with antagonism and distrust. This unfriendly dynamic, many have argued, is evidenced by repeated congressional overrides of Supreme Court cases. While this claim is true in some circumstances, it ignores the friendly relations that exist between these two branches of government—relations that may be far more typical than scholars suspect.

This Article undertakes a comprehensive study of congressional responses to Supreme Court tax cases and makes a surprising finding: Overrides, although the main focus of the extant literature, account for just a small portion of the legislative activity responding to the Court. In fact, Congress is nearly as likely to support and affirm judicial decisionmaking through the codification of a case outcome as it is to reverse a decision through a legislative override. To investigate fully the nature of congressional oversight of Supreme Court decisionmaking, this Article undertakes both qualitative and quantitative analyses of different types of legislative review of Supreme Court decisions—examining codifications and citations, as well as overrides, in legislative debates, committees, and hearings. The result is a series of important and robust findings that challenge and build on the Court-Congress literature, identifying the legal, political, and economic factors that explain how and why legislators take notice of Supreme Court cases.

The study reveals a complex and nuanced interbranch dynamic and shows that the Justices themselves affect the legislative agenda to a greater extent than previously understood. This result challenges scholars who have questioned whether the Supreme Court should have jurisdiction over complex issues, such as those in the economic context, in which the Justices may lack sufficient training. This Article argues that scholars have little need to worry about Court decisionmaking in these areas: Not only do legislators routinely review the Court’s decisions, but they also frequently confirm the outcomes as valuable contributions to national policymaking via the codification process.

Erin Adele Scharff

This Note explores the regulatory role of tax policy in New York City and argues
that the City’s power to tax independently should be increased. Currently, New
York City must seek permission from the New York State Legislature to impose
new taxes or change the structure of existing taxes. This restriction is justified primarily
by the revenue-raising function of tax policy—an analysis that ignores the
important role tax policy plays in creating effective regulatory regimes. The first
Part of this Note sorts out the tangled relationship between fiscal policy tools such
as taxation, regulation, user fees, and spending, and suggests factors relevant to
determining which tool is most appropriate to use in a given situation. The Note
next discusses New York State’s scheme for distributing authority over taxation and
regulation, and provides an overview of local government law. The concluding Part
of this Note argues that New York City should be given more independent taxing
authority and directly addresses arguments against the granting of greater municipal
taxing power.

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