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The New Poor at Our Gates: Global Justice Implications for International Trade and Tax Law

Ilan Benshalom

This Article explains why international trade and tax arrangements should advance global wealth redistribution in a world of enhanced economic integration. Despite the indisputable importance of global poverty and inequality, contemporary political philosophy stagnates in the attempt to determine whether distributive justice obligations should extend beyond the political framework of the nation-state. This results from the difficulty of reconciling liberal impartiality with notions of state sovereignty and accountability. This Article offers an alternative approach that bypasses the controversy of the current debate. It argues that international trade creates “relational-distributive” duties when domestic parties engage in transactions with foreign parties that suffer from an endowed vulnerability, such as the extreme poverty prevalent in the developing world. These relational duties differ from “traditional” distributive justice claims because they rely on actual economic relationships rather than hypothetical social-contract scenarios. In a competitive market, however, private parties cannot address these relational-distributive duties by themselves because doing so would put them at a competitive disadvantage. This Article therefore argues that the only collective action solution to this systemic problem in the current geopolitical setting is the transfer of wealth among states.

This Article then suggests some policy implications of this normative analysis in the field of international tax law. It points out that the allocation of taxing rights is a form of wealth allocation that divides globalization’s revenue proceeds among nations. As such, tax allocation arrangements should help “correct” international trade relationships that fail to meet relational-distributive standards. This discussion stresses a point frequently neglected in both the tax and political philosophy literature: Real-world attempts to promote a more just distribution of global wealth could benefit greatly from the integration of distributive considerations and tax allocation arrangements.

Taxes as Regulatory Tools: An Argument for Expanding New York City’s Taxing Authority

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.

Tax Deregulation

Steven A. Dean

Deregulation has played both the hero and the villain in recent years. This Article evaluates the impact of deregulation on what may be the single most economically important regulatory regime: the income tax. In order to accomplish this goal, it applies the concepts of fiscal arbitrage and compliance spirals to three deregulatory tax reforms. Compliance spirals describe an enforcement dynamic in which the regulator encourages compliance through a system of rewards for cooperation and punishment for noncooperation. Fiscal arbitrage describes policy measures that exploit cognitive biases and other anomalies to deliver political benefits by using minimal political capital. The combination of these two concepts creates a tool for tax authorities to evaluate deregulatory tax provisions for likely costs and benefits. On balance, this Article finds that tax deregulation is likely to be harmful.

Corporate Shams

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.

The Case Against the Tax Deductibility of FCA Relator Fees

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.

Taxing Single Mothers: A Critical Look at the Tax Code

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.

The Broken Safety Net: A Study of Earned Income Tax Credit Recipients and a Proposal for Repair

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.

Are We Married? State Tax Filing Problem After Windsor

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.

Powerful Cities?: Limits on Municipal Taxing Authority and What to Do About Them

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.

Are Progressive Tax Rates Progressive Policy?

Jason S. Oh

Why do income tax systems across the world consistently feature progressive marginal rates? The existing literature tells a political story focusing on the top of the rate schedule and the preferences of the poor and the middle class. According to this standard view, higher rates at the top result from the poor and the middle class using the political process to “soak the rich.” However, this explanation is inconsistent with research showing that public policy is generally more responsive to the preferences of the rich. Explaining marginal rate progressivity as a universal (and exceptional) triumph of the poor and the middle class rings hollow.

This Article resolves the tension in the existing literature by demonstrating how progressive marginal rates are consistent with the preferences of the rich. Marginal rate progressivity is the combination of two policies—higher rates at the top and lower rates at the bottom. This Article shifts the focus to the bottom of the rate schedule and argues that the rich and the middle class benefit from inframarginal tax cuts—rate cuts at low levels of income. The intuition is that taxpayers benefit from rate cuts if they occur at levels that are at or below their own income.

This means that rate progressivity is not entirely progressive policy. Increasing marginal rates at the top increases the progressivity of the fiscal system. But marginal rate cuts at low levels of income can have the opposite effect. They are particularly pernicious because they can be framed as “low-income” tax cuts. A cynical view of marginal rate progressivity is that it allows the rich and politicians to pay cheap lip service to progressivity, even though there are many better tools available for achieving that goal. Unfortunately, cutting inframarginal rates remains politically popular. Both House Speaker Paul Ryan and President Donald Trump’s tax plans feature such tax cuts prominently. Understanding the regressive effect of inframarginal rate cuts has never been more important.