Here are some of the papers that we have been discussing in our Tax Policy Seminar at Harvard Law School (Current Issues in Tax Law, Policy & Practice), organized by Daniel Halperin and Mihir Desai. Having the opportunity to meet these authors and take part in high-level discussions with them, other professors (e.g., Louis Kaplow, Diane Ring) and students is a real privilege.
1. Mitigating the Potential Inequity of Reducing Corporate Rates (Dan Halperin, Harvard Law School)
“Since the statutory marginal U.S. income tax rate on corporate income is higher than the marginal rate imposed by all of our trading partners except Japan, there have been a number of proposals to reduce the U.S. marginal corporate rate. At the same time, it seems likely that the top individual rate will be increased. However, a differential between marginal corporate and individual rates could reduce the overall rate of tax on corporate distributions and enable higher-income taxpayers to shelter their income from services or investments. This paper suggests that we can mitigate these problems if the lower corporate rate is denied to income from services or passive investments and if there is always a second tax on distributed income. The latter requires reducing the step-up in basis at death and the deduction for charitable contributions by the amount of undistributed earnings to prevent taxpayers from permanently escaping tax on earnings retained in the corporation. Nonetheless lower corporate rates allow reinvested corporate profits to earn a permanent higher rate of return. Setting the combined individual and corporate rates on corporate distributions higher than the top individual rate offsets this advantage and also reduces the risk that corporations will be used to shelter income.”
2. Foundation or Empire? The Role of Charity in a Federal System
Brian D. Galle (Florida State University College of Law; GWU Law School).
This Article critiques the prevailing justification for subsidies for the charitable sector, and suggests a new alternative. According to contemporary accounts, charity corrects the failure of the private market to provide public goods, and further corrects the failure of government to provide goods other than those demanded by the median voter.
However, the claim that government can meet the needs only of a single “median voter” neglects both federalism and public choice theory. Citizens dissatisfied with the services of one government can move to or even create another. Alternatively, they may use the threat of exit to lobby for local change. Subsidies for charity inefficiently distort the operation of these markets for legal rules.
Nonetheless, there remains a strong case for subsidizing charity, albeit on grounds new to the literature. Charity serves as gap-filler when federalism mechanisms break down. For example, frictions on exit produce too little jurisdictional competition, and excessively easy exit produces too much competition – a race to the bottom. At the same time, competition from government constrains inefficient charities. Thus, charity and government each perform best as complements to the other.
Finally, this Article sketches the normative legal consequences of these claims. Most significantly, I respond to the claims by Malani and Posner that for-profit charity would be superior to current arrangements. That suggestion would fatally weaken competition between charity and government, defeating the only persuasive purpose for charitable subsidies.
3. Sovereignty, Integration, and Tax Avoidance in the European Union: Striking the Proper Balance
(Lilian V. Faulhaber, Havard Law School, Climenko Fellow Lecturer on Law)
As the need to raise revenue becomes more pressing and public opposition to tax avoidance increases, the European Court of Justice has made it more difficult for the twenty-seven Member States of the European Union to prevent tax avoidance and shape fiscal policy. This article introduces the new anti-avoidance doctrine of the European Court of Justice and analyzes it from the perspective of taxpayers, Member States, and the European Union legal order as a whole. This doctrine is problematic because it has created a legislative vacuum in Europe. No European Union institution has the authority to regulate direct taxation without the unanimous support of all twenty-seven Member States. As the European Court of Justice strikes down Member State efforts to prevent tax avoidance, no institution can step in to replace these Member State provisions. Member States are thus losing sovereignty over policing tax avoidance, but no legislative move toward an integrated approach is possible without the support of Member States. This article proposes several solutions to the problems posed by the doctrine.