What Kinds of Corporate Entities Evade Tax? The Human Factor in Third Party Info Reporting

Under what circumstances should we expect corporate entities to evade tax? The following guest post by Gaute Solheim of the Norwegian Tax Administration posits that it is most likely when they are small, owner-operator gigs, and much less likely when they are giant multinationals. The rationale, drawn from insights about why third party reporting is vital in a self-reporting system, is that the bigger the company, the more people have to work cooperatively to engage in fraud, many of whom will be employees with no direct economic upside. Of course there must be exceptions--Enron comes to mind. But Solheim's observation is that the human self-interest that makes third party reporting an effective compliance tool also minimizes the frequency and scope of Enron-type evasion. Cross posted from the Surly Subgroup.

Gaute Solheim, Senior Tax Advisor, Norwegian Tax Administration

(Mr. Solheim writes in his individual capacity and does not purport to represent the views of the Norwegian Tax Administration.)

I happened to reread a paper by Wei Cui from 2017 on Third Party Information Reporting (TPIR) some weeks ago. Based on my own practical experience working for the Norwegian Tax Administration, I found it hard to agree with him on uselessness of TPIR. In this post, I will explain why I expect good quality in TPIR filing. I plan to write a later post on why TPIR is useful.

I will start with crediting Cui for outlining very well what I will call “the story of the corporate tax revenue collection machine.” He does a good job describing how the government has outsourced the bulk of the revenue collection to corporations. I would love to see papers adding empirical numbers to this description. My Norwegian perspective is a world of VAT, corporations withholding taxes on wages and delivering massive amounts of data used to prepopulate the personal tax filings. The way Cui describe the role of the corporations in the “tax revenue collection machine” is probably even more spot on for me than for a reader with a US perspective.

As I read Cui, he expect legal entities to cooperate sufficiently to ensure fairly good quality TPIR. He does some reasoning on why this is to be expected, but I did not find his arguments very convincing. This may be because for some years I have had a different line of reasoning ending with the same conclusion. What follows is based on material I used in a talk some ten years ago for my colleagues at the Large Taxpayer Office in Norway. The theme of that talk was why we found less evasion in our segment of taxpayers than what other tax auditors found when auditing smaller entities. I called the talk “The Human Factor in Tax Filing”. I believe the reasoning I used there also may explain high quality TPIR.

To make it clear: This is about tax evasion (or deliberately misreporting). Tax avoidance is a different beast.

I started out by observing that legal entities cannot write, and hence are unable to fill out their own tax returns. They need human beings to help them. My next observation was that you can split these “helpers” into two groups. Group one is humans with direct economic upside from evasion, typically the owner(s) of the entities. Group two is humans with no direct economic upside from evasion, typically employees without an owner interest. My third observation was that the influence these two groups had on the filings was strongly linked to the size of the entities. In the smallest one-person owner/manager entities, people with direct personal economic upside from evasion (group one) have a large influence on the numbers filed. In the largest multinational corporations, people with no personal direct economic upside from cheating (group two) do most of the work.

Based on these unsystematic observations of reality, I made the following diagram of my estimate of how the influence of people with economic upside from misreporting (red line) and those without (blue line) varies as a function of entity size. The vertical axis goes from zero control to a hundred percent. On the horizontal axis, each entity is counted as one.I do not have empirical studies to back up any claim that the balance of influence between the two groups shift at a specific gross income or similar figure. If forced to make a guesstimate, I would, for Norway, say somewhere around USD 5 million, with big variations among business segments. I will, for the sake of simplicity, use USD 5 million as the crossing point.

Corporations with less than USD 5 million in revenue are by far the main bulk of the population. Based on this perspective, we would logically start wondering why all these entities represented by humans with incentives to cheat average to a compliance rate of 90% or better. This is the perspective I understand Cui is debating in the last half of his paper, and he formulated some explanations that did not fully convince me.

As a longtime tax auditor, the number of entities to me is an administrative problem. I’ve always measured my own work in money saved: How much of the tax gap did I manage to plug? To get this perspective on reality, I must change the unit of measurement on the horizontal axis from entities to dollars. Each entity claims a space equal to the share of the total government revenue collected or paid by that entity.Something very interesting happens to the perspective when we change from entities to dollars: The main bulk of government revenue is collected, reported and paid by the small group of big entities where the people with no upside is in full control over the numbers reported.

I only have hard numbers for corporate income tax (CIT) in Norway to back up this perspective, but I am confident that it holds true in general. Sixty-five percent of all CIT in Norway is paid by entities with revenue higher than approximately USD 150 million. The corporations with billions in revenue and thousands of employees are few, but they represent the bulk of what matters. When we use this perspective—money—we see that individuals with no personal gain from non-compliance handle the main share of input to the revenue collection machine and TPIR. This is true whether the reports are on wages and taxes withheld from them, VAT, or the entities’ own corporate income tax.

There is another important human factor, the down side. I have observed legal entities with feelings only when someone employed by the entity has made a mistake and the mistake has become public. The public relation department will issue a statement telling the public “The entity is very sorry that a trusted person have failed to live up to the high ethical standards of the entity as explicitly laid out in internal memos, rules, etc.” Then they throw that someone under the bus. Everybody knows this.

Since everybody knows this, it would be strange if that knowledge did not shape the behavior of the people engaged in taking care of compliance tasks on behalf of the huge impersonal corporation. They have no personal gain and they know who the scapegoat will be.

Based on this rather simple analysis of the human factors involved, I am convinced that compliance and quality TPIR is what I in general should expect from large corporations. I do know from experience that in some particular settings this will not hold true, but the big picture is to expect compliance. I will now shift to the smaller entities.

Cui gives a few examples illustrating how the employer and the employee have a win-win scenario in misreporting (cheating). He leaves out some elements that I find very practical in real life. I must confess that a few times in my life it has happened that I was guilty of doing something qualifying at least for a fine. But I’ve never been tempted to do something that relied on recruiting a partner in crime. Somehow human nature realises without thinking too hard about it that conspiracy is on a different scale than a moment of weak ethics. If you do not figure it out on your own, the penal code makes that very clear.

The win-win situation described by Cui differs a lot from an owner/manager deciding to keep some income off the books. While you may do that alone as owner/manager, the Cui win-win may only be established by recruiting someone to take part in the scheme. In addition, the owner knows that employers and employees from time to time end up with conflicting interests. Lay-offs are but one example. From my limited knowledge of the US penal system and tax legislation, I have the impression that an employee deciding to inform the IRS about the misdeeds of a corporation may get much more lenient treatment than the corporation and the owner/manager of that corporation. As a hypothetical owner/manager, I would at least think twice.

This is not saying that this kind of collusion does not happen. It does, but the human factor and a simple risk analysis informs me that it should be more the exception than the rule. Undeclared income is a much more likely scenario in the small corporations than manipulated TPIR. This result is not produced by the integrity of the corporation, which I believe has none, but is what you expect from human beings when acting based on the incentives present in the situation. The sum of these very human choices is what we may call a compliant corporation, sending the tax authorities high-quality TPIR.

As Cui correctly observes, even high-quality TPIR is pointless if it does not contribute to something useful. Tax authorities are collectors of revenue, not of data points. Why I do not agree when Cui concludes that TPIR is not useful will be the theme for a later blog post.

And again: This was about evasion, not avoidance.

Dagan on International Tax and Global Justice

Tsilly Dagan recently posted this new paper on the limitations of normative tax analysis that constrains itself to the state. Here is the abstract:

Inequality, as well as the scope of the duty of justice to reduce it, has always been a central concern of political justice. Income taxation has been seen as a key tool for redistribution and the state was the arena for discussions of justice. Globalization and the tax competition it fosters among states change the context for the discussion of distributive justice. Given the state’s fading coercive power in taxation and the decreasing power of its citizenry to co-author its collective will due to global competition, we can no longer assume that justice can be realized within the parameters of the state. 

International tax policy in an effort to retain justice often opts for cooperation as a vehicle to support distributive justice. But cooperation among states is more than a way for them to promote their aims through bargaining. Rather, it is a way for states to regain legitimacy by sustaining their very ability to ensure the collective action of their citizens and to treat them with equal respect and concern. The traditional discussion in international taxation seems to endorse a statist position — implicitly assuming that when states bargain for a multilateral deal, justice is completely mediated by the agreement of the states. 

In contrast, this Article argues that such a multilateral regime intended to provide the state with fundamental legitimacy requires independent justification. Contrary to the conventional statist position, I maintain that cooperating states have a duty to ensure that the constituents of all cooperating states are not treated unjustly because of the agreement. I argue that not only cosmopolitanism but political justice too requires that a justiciable cooperative regime must improve (or at least not worsen) the welfare of the least well-off citizens in all cooperating states. I explain that cooperation alone is no guarantee of improved welfare and that certain transfer payments between rich and poor countries might be required to ensure this.

 This is an important and provocative paper, highly recommended reading.

Gribnau & Vording on The Birth of Tax Law as an Academic Discipline

Hans Gribnau and Henk Vording recently posted an interesting paper on SSRN. Here is the introduction:

The academic discipline of tax law as we know it today has its roots in the late nineteenth century. In the Netherlands, it emerged out of a confrontation between (predominantly British) classical political economy and German Staatslehre (theory of the state). This contribution analyses the impact of the relevant ideas on Dutch theorizing about taxes. It is argued that tax law as a legal discipline is heavily indebted to the German tradition. This may help to explain why it has proven difficult to develop meaningful communication between tax lawyers and tax economists.  

The paper focuses on the development of tax doctrine in the Netherlands over the nineteenth century, but the paper's thoughtful analysis of the evolution of tax goals and priorities, the conceptualization of the taxpayer-state relationship, the complex interaction on tax policy of political and economic theory, and the impact of rule of law theory on tax policy are of general interest.

Heyka on Tax Treaty Arbitration and A World Tax Court

Last fall I via twitter I shouted out two of my students who won the Tax Analysts Student Writing Competition, in the international category:

Very proud that two of my students @LAWMcGill won this year: @montano_cabezas (2015) and @Heyka14 (2017) https://t.co/XjWV2A66Cj

— Allison Christians (@taxpolblog) July 11, 2016

I posted about the first paper long ago but I inadvertently neglected to post the second.  Correcting that oversight, here it is, available at Tax Analysts: A World Tax Court: The Solution to Tax Treaty Arbitration, by Jake Heyka. Here is the brief abstract by TA:

Jake Heyka examines tax treaty arbitration standards while demonstrating that as a matter of fundamental justice, arbitration should be revamped. He proposes the creation of a world tax court.

Heyka begins by observing that "[t]he institution of international tax treaty arbitration (ITTA) is hotly debated in international business and tax law. While the process is helpful because it pressures governments to resolve contested tax decisions, opponents have called it 'secret and evil.'"
He then makes the provocative observation that "the use of ITTA ultimately frustrates the resolution of tax disputes and should be supplanted by a world tax court." In support of his proposal, Heyka lays out the history and critique of tax treaty arbitration (including by me) and concludes:

Standardizing ITTA will create some procedural certainty but does not guarantee consistent use of those procedures, allow the public to see whether the process is fair, or establish reliable precedent. As Lindencrona and Mattson suggested over 30 years ago, ITTA should be a stepping stone to what the world ultimately needs: a world tax court.

As radical as it may seem, the idea is not far-fetched. World courts exist in many commercial and noncommercial contexts, and those that deal with money rather than crime are followed by many countries and used quite often. Moreover, state authority is regularly ceded to resolve disputes between commercial parties in arbitration courts such as the Permanent Court of Arbitration in The Hague, the London Court of International Arbitration, and many other arbitration institutes. A world tax court would merely serve as a place to resolve tax disputes in a similar manner while sustaining the public nature of tax law.

While I am late to post it, Heyka's article remains timely as the inclusion of arbitration in the recently released MLI is sure to keep the issue front and center in international tax discourse. Congrats Jake, and sorry for the delay in posting your accomplishment.

Cockfield on Information Exchange

Arthur Cockfield has posted a paper of interest, entitled How Countries Should Share Tax Information. Here is the abstract:

There are increasing policy concerns that aggressive international tax avoidance and offshore tax evasion significantly reduce government revenues. In particular, for some low income countries the amount of capital flight (where elites move and hide monies offshore in tax havens) exceeds foreign aid. Governments struggle to enforce their tax laws to constrain these actions, but are inhibited by a lack of information concerning international capital flows. The main international policy response to these developments has been to promote global financial transparency through heightened cross-border exchanges of tax information. The paper discusses elements of optimal cross-border tax information exchange laws and policies by focusing on three key challenges: information quality, taxpayer privacy, and enforcement. Relatedly, the paper discusses how the exchange of automatic ‘big tax data’ combined with data analytics can help address the challenges.

Cockfield seeks to find a solution that balances the need of the state for extensive information in order to protect the integrity of the income tax system against the need of the individual for protection from abuse by the state. That is no easy balance to strike. From the paper:

All of [the recent information gathering and exchange] efforts seek to provide governments with more and better tax information, and reduce costs through agreement on underlying EOI rules and principles. The reforms, however, largely do not address how financial secrecy laws subvert global financial transparency initiatives. Nor do they address legal technical complexity that raises transaction costs, and makes it even harder for low and middle income countries to implement and enforce EOI. While the EOI reforms are positive steps, given an environment of high transaction costs it may be difficult to make progress in addressing key policy challenges.... 

Data availability, usefulness and verifiability are three components of high quality information that can help governments pursue their cross-border investigations and audits. In particular, transferred information should be relatable to domestic tax identification measures, and checked against third party reporting, and withholding tax disclosures. Once this is done, governments can conduct analysis to determine audit risk by focusing on issues such as taxpayer segmentation, dealings between the taxpayer and offshore service providers, and cross-indexing tax and financial information against non-tax data (e.g., insurance policy disclosures). 

Against this desire for high quality tax information stands (shrugs?) taxpayer privacy concerns. The apprehensions arise from the varied levels of domestic legal protection afforded to privacy rights, along with the risk of abuse or misuse of transferred information. Accordingly, broader multilateral agreement on privacy protections is likely a prerequisite to effective EOI. This hoped-for cooperation is hindered by the fact that many countries refuse to abolish their financial secrecy laws, which stands as one of the main barriers to optimal reform.

My view is that maintaining the integrity of the income tax system appears to require building the panopticon, and much more besides. The steady decline of support for coherent corporate income taxation makes greater and greater individual surveillance necessary, while also making personal income taxation harder. I am not sure where the point lies at which the costs and risks attendant to building the necessary compliance and enforcement infrastructure exceed the benefits of maintaining personal taxes based on income.

Kill Switches in the New US Model Tax Treaty

I posted previously on the new US Model, which was released in February of this year; I've now posted my article, co-written with McGill PhD student Alex Ezenagu, on the "kill switch" provisions in the new model. These provisions are found in the new articles and definitions involving special tax regimes and subsequent law changes, which would allow countries to switch on and off specified treaty benefits if their treaty partners get too aggressive in the ongoing race to the bottom on tax.

Here is the abstract:

The new US model income tax treaty contains an unusual addition: mechanisms for the parties to unilaterally override the negotiated treaty rates in specified circumstances. Previewed last year in proposed form—a first for Treasury—these new mechanisms work as kill-switches, partially terminating the treaty as to one or both treaty partners. The idea is to forestall a more problematic outcome, such as an enduring breach of one of the parties’ expectations, or the opposite, a complete termination of all the treaty terms in the face of such a breach. Yet embedding a kill-switch in a treaty creates distinct legal, procedural, and political pressures in the tax-treaty relationship that implicate treaty negotiation, ratification, interpretation, and dispute resolution. Kill-switches also communicate a defensive tenor in the tax treaty relationships among many countries. This Article analyzes the new kill-switch provisions and concludes that their introduction in the U.S. Model reflects the steady deterioration of tax treaties from essentially diplomatic documents premised on the good faith of the parties to detailed contracts drafted in anticipation of the opposite.

It has long been assumed that tax treaties are uncontroversially technical agreements that no one outside of tax circles cares about or pays attention to--including, it seems, all too many lawmakers tasked with adopting these agreements into law. But with the US Treasury and the EU competition commissioner trading barbs over the fence about what seems right or fair when it comes to global tax competition and coordination, this assumption might be changing. The consensus built up over decades by OECD nations is under stress as the pressure for coherence in the international tax realm increases. Treasury released these provisions in draft from last fall, expressly in order to influence the OECD's work on BEPS. Now that the provisions are in the model, it remains to be seen how they will play out as BEPS, currently at a mid-cycle of norm making, moves from the articulation of principles to the implementation phase. This article doesn't provide answers or predictions about the future but it examines one aspect of the ongoing contestation and tries to situate it in historical and contemporary terms.

Tax Coop 2016: "Winning the Tax Wars" May 23-24

Tax Coop and the World Bank are hosting a conference on tax competition and cooperation to be held in Washington DC on May 23-24. As last year, I've constructed the debate, which this year will be livestreamed on May 23 at 16:15 EST.  I'll post the link when I have that information. At last year's conference, Dan Mitchell (Cato) and Richard Murphy (TJN) put corporate taxation on trial, debating the continuing viability of this tax in the face of technological innovation and economic globalization. This year's debaters are Alison Holder of ActionAid and Veronique de Rugy of the Mercatus Center at George Mason University.

They will debate the following:

What’s Better for Developing Countries: 

Tax Competition or Tax Cooperation?

This question will be explored through a series of three resolutions, as follows:

1. First, be it resolved that: tax competition harms developing countries by reducing their capability to raise fiscal revenue to finance physical and social infrastructure needed for economic growth and social inclusion.
2. Second, be it resolved that: tax competition increases developing countries’ reliance on foreign aid, making them more vulnerable to aid volatility. 
3. Third, be it resolved that: tax competition aggravates existing income disparities between developed and developing countries.

Arguing the “affirming side” of each resolution will be Alison Holder of ActionAid. Arguing the “opposing side” of each resolution will be Veronique de Rugy of the Mercatus Center at George Mason University. Evidence from all jurisdictions will be admissible. The emphasis will be on persuasive, clear, and logical argumentation. The debate will proceed in four rounds and will be moderated and judged by Louise Otis of McGill University and Jay Rosengard of Harvard University. Last year's debate was definitely a highlight of the conference and I look forward to hosting Ms. Holder and Ms. DeRugy for this year's event. 

The full conference program features a slate of distinguished speakers from around the world and across public, private, and academic sectors.  Registration is free; additional program and speaker information available here and you can follow @taxCoop on twitter for updates and links. 

This Friday in London: Conference on The Changing Shape of Tax Avoidance

This Friday, I'll be in London participating in a conference on tax avoidance and evasion, hosted by the Journal of Tax Administration. Here is the program:

11.00 – 11.15 Welcome and Introduction

11.15 – 11.50 Matthew Rablen: Optimal Income Tax Enforcement in the Presence of Tax Avoidance

11.50 – 12.25 Maya Forstater: Can Stopping ‘Tax Dodging’ by Multinational Enterprises Close the Gap in Development Finance?

12.25 – 13.00 Allison Christians: Tax Avoidance in a World of Aggressive Tax States

13.00 – 13.45 Lunch

13.45 – 14.15 Federica Bardini: The “Ius Commune Europeum” on Tax Avoidance

14.15 - 14.45 Shu-Chien Chen: The Common Pattern of the “Tax Avoidance Concept” in the EU and USA

14.45 – 15.00 Discussion

15.00 – 15.20 Break

15.20 – 15.55 David Duff: Tax Avoidance – Causes, Consequences and Responses

15.55 – 16.30 David Quentin: Tax Risk Mining and Corporate Responsibility for Human Rights

The venue for this conference is Friends House, 173 – 177 Euston Road, London.

Here is the abstract for my presentation:

Tax Avoidance in a World of Aggressive Tax States 

Media coverage of tax “dodging” by high profile elites and multinational companies leads the public to believe that tax avoidance happens when individuals act to thwart the efforts of the state. Confined to the domestic arena this may be an apt description, and a problem anti-avoidance regimes are designed to solve. But on an international scale, tax avoidance is not a one-person show. Instead, it involves interactions among four types of actors: individuals, home states, host states, and intermediary states. International tax avoidance persists largely because home, host, and intermediary states intentionally use their tax systems to lure investment away from other jurisdictions that impose higher tax burdens, and individuals do their best to exploit available opportunities to the fullest. In deciding whether and how law should be used to prevent international tax avoidance, the goals and interests of each of the four actors must be examined.

May 4: International Tax Governance in Action at Tilburg University

Next week, I will be participating in a workshop at Tilburg University in the Netherlands on the topic of International Tax Governance, a timely topic especially given the recent developments in the coordination of the international organizations, the expansion of the OECD's global forum idea to monitor BEPS, the impact of the state aid cases within and beyond Europe, and the increasing role of NGOs in shaping international tax policy. Here is the program:

10:00- 10:30	Welcome and registration
10:30- 11:00	Opening
	Cees Peters (Tilburg University): International Tax Governance in Action
11:00- 12:30	Session 1 - Transparency
	Edwin Visser (PwC): reaction of MNC's to transparency pressure: CbCR and CSR discussion (30 minutes + 15 minutes discussion)
	Maaike van Diepen (Tax Justice Network): The perspective of an NGO (30 minutes + 15 minutes discussion)
12:30- 13:30	Lunch break
13:30- 15:00	Session 2 - EU State Aid
	Allison Christians (McGill University): a US perspective - the reaction of the US government and US MNC's
	Anna Gunn (Leiden University): an EU perspective - the reaction of the EU Member States and EU MNC's
15:00- 15:30	Break
15:30- 17:00	Session 3 - Compliance of states with new norms of international taxation
	Carla De Pietro (Tilburg University and University of Bologna): Implementation of the OECD BEPS measures (Action 6) in the light of the relationship between international and EU law.

More details and registration information are here.

Thinking about the OECD's New World Tax Order

Last week I presented a work in progress on the OECD's newest global forum, which is being created to fulfill and further its BEPS initiative, as part of the BYU symposium "The Cutting Edge Of International Tax Reform." I tentatively titled my paper (ok, outline) "Not So Soft Law: The OECD Tax Regime" but I don't think I will stay with that title because soft law is still a fairly obscure notion among tax academics and practitioners, at least, in North America (it seems somewhat better-understood elsewhere). In any event I don't have a working paper yet but here is my working abstract:

Tax jurisdiction gaps and overlaps are inevitable in a world economy powered by constant cross-border flows of capital and income. States have long sought to overcome issues thus created by engaging in consensus building over nonbinding “soft law” norms via the Organisation for Economic Cooperation and Development (OECD). But with its most recent exercise, the Base Erosion and Profit Shifting initiative, the OECD is hardening these norms into a genuine global tax regime. It is doing so with model legislation, peer monitoring, and institutions that supplant its more inclusive policy rival, the United Nations, bringing in non-OECD countries as "BEPS Associates". This Article argues that the implications of these developments include building a new international tax organization (or world tax order) to avoid the encroachment of the United Nations as a potential tax policy rival, thus ensuring the continuing global tax policy monopoly of a core set of OECD nations.

I'm still thinking through all of the fascinating institutional changes taking place as part of the BEPS process, and don't have any grand conclusions. International tax governance has become infinitely more complicated over the past several years, with multiple institutions popping up as potential rivals for the OECD's monopolistic grip on global tax policy norms and processes.   I welcome the OECD's desire to develop an inclusive forum to enable more effective participation in global tax norm development. However I am wary about whether and how inclusive the proposed institution can be in light of the observation that agenda-setting is such an important aspect of effective participation. BEPS Associates don't quite seem like full partners yet, hence their title unfortunately seems all too apt.

If non-OECD countries set up a new forum, to which they invited OECD countries as Associates, would the major action items be those covered in BEPS? I am not convinced. A serious study of formulary apportionment as an alternative to transfer pricing seems like a topic that a truly inclusive forum would insist upon immediately. That is not to say that formulary apportionment is wonderful or great or a panacea--I am not sure it is. But there are so many calls for it, it seems to me impossible to understand the continued insistence by the OECD to quash the discussion. If it's not a great idea, fine: study it and reveal its weaknesses. If it is a great idea, why suppress it? Perhaps there are good reasons, but in general I favour studying things to not studying them, especially when not studying them looks like an attempt to intentionally thwart progress. Similarly, I would expect such a forum to tackle items of interest especially to "less developed" countries (as far as that term may be adequately defined), such as the longstanding source/residence compromise and the expansion of the permanent establishment regime to deal with services.

If these items were to become topics of attention and study within or because of the new OECD forum, I think I would reflect on this new tax order as a success story in developing the means for effective participation of more countries in the global tax dialogue. If not, I would be less sure that progress has been made. At this stage I have far more questions than answers.

Rocha on Balancing Rights and Power between State and Taxpayer

Sergio André Rocha recently posted a discussion on information, transparency, and the rights of taxpayer versus those of states, of interest. He argues that hard-fought rights needed to balance the unequal power between state and individual are being abandoned in the populist rush to protect the state against multinational tax dodging. Central to this argument is the claim that states are not hapless victims of ruthless tax managers and CEOs, rather they are the very architects of the system. He worries, I think, that suspending taxpayer rights to get at the big bad corporations will ultimately result in suspending rights for individuals, setting up the conditions for states to abuse their power. Here are a few excerpts (footnotes omitted):

There is no doubt that taxation is one of the areas where the balance between the legitimate exercise of Government power and the illegitimate violation of citizens’ rights is most challenging. 

...The transformation of the majority of modern States into Fiscal States – i.e., States that depend on tax collection to obtain the resources to fund all its activities – has changed the nature of the obligation to pay taxes. Some authors have begun to argue that there is a fundamental or constitutional obligation to pay taxes.

However, this line of thought, to which we subscribe, has been used to support an inversion of the whole structure of tax systems. Legal principles that are, at their core, protections of taxpayers against the State have been transformed into protections for the State against taxpayers. 

Let’s consider, for instance, the principle of transparency, which is at the center of modern constitutional, administrative, financial, and tax law. It is, first and foremost, a protection for the citizens against the State, establishing as a goal a state of affairs that guarantees full disclosure of a government’s actions to its citizens. 

The principle of transparency is not a one-way street. It also applies to citizens, requiring disclosure and combating opaque situations that prevent the due application of laws in general. Nevertheless, one should not forget: State and Government transparency come first. 

This maxim seems to have been forgotten by those now in charge of reshaping the international tax regime. 

...[OECD Director Pascal Saint-Amans recently] stated that, "Transparency, from my perspective, is transparency from the taxpayer to the Tax Administration, and maybe the other way around as well. ..."  

We should make no mistake: once legal principles have been mutilated and taxpayers’ rights overturned, effects will be felt by all taxpayers – individuals and legal entities alike. 

...Both the Global Forum’s and BEPS’ work share a common feature: they are aimed at optimizing States’ tax collection. The taxpayer – the citizen – is not in their focus. This is unacceptable. There is nothing more urgent than recovering the protagonist role of the taxpayer in taxation, where he rightfully belongs. This does not mean that their focus is completely misguided. It means that they need to find a way to achieve their rightful objectives without leaving taxpayers’ rights behind.

More at the link above; worth the read.

Apple's private meeting to lobby the European commissioner in state aid investigation

The FT reports that Tim Cook took it upon himself to go and visit the European commissioner Margrethe Vestager, "to lobby the EU’s antitrust chief weeks before she is set to rule on a landmark case that could force the California-based technology company to pay billions in underpaid taxes to Ireland." Really? Let's see, this is a private meeting with a person who is in charge of deciding whether your company benefited from a scheme to violate an agreement among EU members on trade practices within the internal market.

Pretty clearly the Commissioner should have flatly refused such access. I don't know what the rules are for private parties to attempt to influence a sitting Commissioner in the midst of a procedure laid out in an international treaty that directly impacts one's pecuniary interests. Apple is not a party to a case; rather it is a beneficiary of something Ireland did, and that it the action being investigated. But Apple has had a chance to make its statements and explanations according to a process. According to the EC, the formal investigation procedure accords an opportunity for input from all those that may be affected by its investigation:

The Commission is obliged to open a formal investigation under Article 108(2) TFEU where it has serious doubts about the aid's compatibility with EU State aid rules, or where it faces procedural difficulties in obtaining the necessary information. 

The decision to initiate this procedure is sent to the relevant Member State. It summarises the factual and legal bases for the investigation and includes the Commission's preliminary assessment, outlining any doubts as to the measure's compatibility with EU state aid rules. The decision is published in the EU's Official Journal, and Member States and interested third parties have one month from the date of publication to submit comments. The Member State concerned is in turn invited to comment on observations submitted by interested parties.

I have not seen comments submitted by Apple according to this procedure. It seems to me that the private meeting has an appearance of impropriety. First, it was private so it does not form part of a record of information reviewed in the course of the investigation. Neither party has given any public comment regarding what was discussed. Having a private meeting deprived Ireland of its role in responding to observations submitted by interested parties, as described above. The conversation took place for the specific purpose of influencing a decision. The conversation raises the question of whether others have also private meetings, also trying to influence the commissioner beyond the procedures laid out for investigations.

I note that "All decisions and procedural conduct of the Commission are subject to review by the General Court and ultimately by the ECJ." The Commissioner will not likely seek review of its own decision. I do not know whether other member states could seek such a review. It seems most likely that Ireland could seek a review, which it would only do if the decision was unfavorable. If that were to happen, would Tim Cook also have private meetings with the judges of the ECJ?

I should hope not.

Please Give: Passionate Plea for IRS Funding from Former IRS Commissioners

The IRS faces constant funding pressure from Congress, despite becoming a victim of constant mission creep thanks to Congressional mandates (ACA and FATCA in particular). Over the years many have pled with Congress to stop underfunding the agency. The latest comes from seven former commissioners, who note that not least among the reasons to fund the IRS is the need to spend money on cyber security as the IRS fends off one million hacking attempts each week.

That's a lot of hacking because of course the payload is enormous. FATCA has surely expanded the payload significantly by developing an enormous database of personal information attached to bank account numbers and detailed account activity on a global scale. Even a small breach of security with respect to that vault will be disastrous for the taxpayers involved.

The commissioners also suggest that the IRS workload is going to increase due to BEPS. BEPS is expected to result in more treaty-based conflicts among jurisdictions, so I expect more competent authority hours will be needed. But it's likely also the case that country-by-country reporting requirements will add another enormous treasure trove of information to the database, further increasing the payload.

At minimum, Congress has simply got to fund security for this massively expanding taxpayer information database.

November 9, 2015

The Honorable Thad Cochran

Chairman

Committee on Appropriations

United States Senate

113 Dirksen Senate Office Building

Washington, D.C. 20510

The Honorable Harold Rogers

Chairman

U.S. House Committee on Appropriations

U.S. House of Representatives

2406 Rayburn House Office Building

Washington D.C. 20515

The Honorable Barbara A. Mikulski

Vice Chairwoman

Committee on Appropriations

United States Senate

503 Hart Senate Office Building

Washington, D.C. 20510

The Honorable Nita M. Lowey

Ranking Member

U.S. House Committee on Appropriations

U.S. House of Representatives

2365 Rayburn House Office Building

Washington, D.C. 20515 

Subject: IRS Appropriations for Fiscal Year 2016

Dear Chairman Cochran, Vice Chairwoman Mikulski, Chairman Rogers and Ranking Member Lowey: 

We are all former Commissioners of the Internal Revenue Service. Over the last fifty years we served during the administrations of Presidents John F. Kennedy, Lyndon B. Johnson, Ronald Reagan, George H.W. Bush, William J. Clinton, and George W. Bush.

We are writing to express our great concern about the proposed reductions by the House and Senate in appropriations for the Internal Revenue Service for the current fiscal year that will end on September 30, 2016. We understand that the Appropriations Committees in the House and Senate have proposed to reduce the FY 2015 IRS appropriation of $10.9 billion by $838 million and $470 million, respectively, for the current fiscal year. If Congress were to reduce the IRS appropriation for the current year, it would represent yet another reduction in the IRS appropriation. The appropriations reductions for the IRS over the last five years total $1.2 billion, more than a 17% cut from the IRS appropriation for 2010. None of us ever experienced, nor are we aware of, any IRS appropriations reductions of this magnitude over such a prolonged period of time. The impact on the IRS of these reductions is that the IRS has lost approximately 15,000 full-time employees through attrition over the last five years, with more losses likely in the current fiscal year unless Congress reverses the funding trend. These staffing reductions come at a time when the IRS workforce is aging, with nearly 52% of IRS employees now over the age of 50 and 24% already eligible to retire. Three years from now, 38% of IRS employees will be eligible to retire. This loss of IRS knowledge and experience is alarming, particularly in light of the fact that, out of a present workforce of about 85,000 employees, the IRS has only about 3,400 employees under the age of 30 and only 384 employees under the age of 25 due to hiring freezes for budgetary reasons at the IRS since 2010 and periodically from 2005 to 2010. Over the last fifty years, none of us has ever witnessed anything like what has happened to the IRS appropriations over the last five years and the impact these appropriations reductions are having on our tax system.

These reductions in IRS appropriations are difficult to understand in light of the fact that, at the same time these reductions have occurred, the Congress repeatedly has passed major tax legislation to substantially increase the IRS workload. Most recently the Congress passed the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act, two major new programs, each of which significantly expands the IRS' tax administration burdens. The IRS personnel reductions come at a time when the IRS is stretched to the breaking point to cope with tax enforcement challenges attributable to global and domestic changes that are impacting our tax system. Increasingly, the United States is facing tax challenges as the result of efforts that are taking place in the international tax arena to deal with the tax non-compliance that is accompanying the continued globalization of business and investment activities. The most recent tax changes to address international tax non-compliance are proposed in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting Report. Regardless of one's view of these proposed changes, it is clear that the IRS will be substantially impacted by changes and challenges of other countries who adopt them.

Additionally, increasing incidents of identity theft and refund fraud are being perpetrated against our tax system by large, sophisticated organized crime syndicates around the world. These criminals seek to file false returns and claim fraudulent refunds using personal taxpayer data obtained from sources outside the IRS. At the same time, many unlicensed, unregulated return preparers are preparing and filing fraudulent tax refund returns. Every time there is an information technology hacking event in the public or private sectors in which Social Security numbers are stolen, the likelihood exists for additional identity theft and refund fraud. The growing refund fraud challenge to our tax system is especially alarming to us because of the need, which is fundamental to our tax system, for the IRS to be able to assure taxpayers who are paying their fair share of taxes that other taxpayers are doing the same thing. To emphasize the seriousness of refund fraud, the Government Accountability Office earlier this year placed identity theft and refund fraud on its list of "high risk areas" in the federal government, a sure sign to each of us that the IRS should have more, not fewer, enforcement resources to deal with this threat to the integrity of our tax system,

To place the impact on our tax system of the Congressional IRS appropriations reductions over the last five years in its proper context, Congress almost annually over the last 25 years has passed legislation that has imposed additional burdens on IRS tax collection and administration under our revenue laws. During this time, the Congress also repeatedly added more and more socio-economic incentives to the tax code and called upon the IRS to administer these new socio-economic programs, including healthcare, retirement, social welfare, education, energy, housing, and economic stimulus programs, none of which is related to the principal job of the IRS to collect revenue. At the same time, Congress passed even more legislation to pay for these tax spending programs. The result is that almost 30 years after the 1986 Tax Reform Act, our tax laws are a mess. Our tax laws have become so difficult for taxpayers to understand that 80% of all individual taxpayers now use paid consultants or software to prepare their income tax returns. Because of insufficient IRS resources in FY 2015, an average of more than 60 percent of the taxpayers who called the IRS for assistance in preparing their returns during the last filing season were unable to reach an IRS assistor, even after many taxpayers had remained on the telephone for more than 30 minutes before they were automatically cut off because of the volume of calls, which the reduced numbers of IRS assistors were unable to handle. Equally serious are the cybersecurity threats illustrated by the problem that occurred earlier this year involving unauthorized attempts to access taxpayer information using the IRS' Get Transcript online application. Separately, the IRS continues to experience about one million attempts each week to hack into its main information technology systems. Although the IRS has so far successfully thwarted these attacks and its main systems remain secure, all of this astonishes us and emphasizes to each of us that the IRS taxpayer assistance and IRS information technology resources are severely underfunded, especially when compared to the increasing cybersecurity budgets of private sector companies.

It is clear to each of us that the IRS appropriations reductions over the last five years materially and adversely affect the ability of the IRS to assist taxpayers who are trying to comply with their tax obligations, as well as the ability of the IRS to detect and deter taxpayers who have not complied with their tax obligations. Recently, we understand that the IRS estimated a direct annual revenue loss to the Federal government in tax enforcement at $6 billion last year and $8 billion this year, due to such appropriations reductions. Historically, for every dollar invested in IRS tax enforcement, the United States received $4 or more in return, and we understand that continues to be true today.

The Congressional Budget Office in its June 2015 Long-Term Budget Outlook projected future fiscal challenges to the United States because of the large and increasing size of our national debt and rising future operating deficits attributable to an aging U.S. population and rising healthcare costs. It, therefore, is imperative that our tax system in the future operate at an optimal level in order to maximize the revenues the IRS collects. For that to happen, the IRS must be able to assist taxpayers who are trying to comply with their tax obligations, and at the same time be able to enforce the tax laws against those taxpayers who have not complied with their tax obligations. In short, because of our country's fiscal and other challenges, our tax system must work and work well to collect the taxes that are owed.

Some have argued that the IRS can solve these problems by simply becoming more efficient. This argument ignores the reality that the IRS is already, by far, the most efficient tax collection agency among large countries in the world. The OECD recently released its bi-annual analysis of tax administration across the developed world and reported, based on 2013 statistics which don't reflect the most recent IRS budget cuts, that the amount the IRS spends to collect a dollar in taxes is approximately half the average amount spent by all OECD countries. Germany, France, England, Canada and Australia all spend as much as two to three times the amount the IRS does to collect a dollar of revenue.

In light of the foregoing, we fail to understand how it makes any logical sense to continue to reduce, rather than increase, the IRS budget for FY 2016 in order to optimize the IRS' ability to provide taxpayer service and to enforce the tax laws to increase revenue collections. To put it succinctly, we do not understand why anyone with present and projected debts and annual losses as large as those of the United States would refuse to pay for telephone assistance to people trying to fulfill their tax obligations, would turn their back on $8 billion annually in additional revenue, or would fail to make an investment that offers a return equal to at least four times the amount invested. For these reasons, we respectfully call upon each of you to support and work to accomplish the passage of an IRS appropriations request for FY 2016 that is substantially in excess of the appropriation for the IRS in FY 2015.

Mortimer M. Caplin (1961-64)

Sheldon S. Cohen (1965-69)

Lawrence B. Gibbs (1986-89)

Fred T. Goldberg, Jr. (1989-92)

Shirley D. Peterson (1992-93)

Margaret M. Richardson (1993-97)

Charles O. Rossotti (1997-2002)

In global tax governance, institutions matter.

José Antonio Ocampo posted a plea for institutional reform in tax policymaking today,  in which he decries the jealous guarding of tax policy exclusivity by OECD countries, especially the US and the UK. At the recent Financing for Development conference, developing countries called for a greater role for the UN in global tax governance but the OECD countries balked. Ocampo writes:

The OECD, whose members are essentially the world’s 34 richest countries, certainly has the capacity to set international standards on taxation. Yet the domination of a select group of countries over tax norms has meant that, in reality, the global governance architecture for taxation has not kept pace with globalization. 

The Monterrey Consensus reached in 2002 included a call to enhance “the voice and participation of developing countries in international economic decision-making and norms-setting.” But although the OECD invites some developing countries to participate in its discussions to establish norms, it offers them no decision-making power. The OECD is thus a weak surrogate for a globally representative intergovernmental forum.

I understand that it is costly and complicated to develop institutions that allow for meaningful participation by all people affected by transnational tax policy norms.  But the international tax system is a resource allocation machine that has significant impacts on people's life chances across all populations. I fail to see what principles of justice support a world in which a small and privileged group of people make decisions of both process and substance that directly impact, and yet purposefully and systemically exclude, the majority of the world's population. The substance of norms, rules, and standards may matter in global tax governance, but ultimately institutions matter even more.

Updated: Gotcha! Yet another obscure asset reporting form for US persons

UPDATE: as of sometime this afternoon (depending on your time zone), the BEA has updated its website to extend the filing deadline to June 30 for all new filers. Moreover, it appears that the BEA definition of US Persons is generally limited to persons resident in the United States (with specific exceptions, see comment from Andrew below). As I mention in the comments, I am a bit wary about drawing conclusions of law from instructions to forms but I do think that the instructions at least form the basis for reliance that most physically non-resident US citizens should not be required to fill out the BE-10.  The sudden deadline extension nevertheless suggests that a number of people have been caught by surprise by the new reporting obligation, so that my main point about educating one's regulatory target is still apposite. I have revised this post accordingly.

It seems that in the United States, the asset reporting forms and non-filing penalties just keep on coming, and yet the will to inform individuals about their obligations--especially those who live outside of the United States and do not receive client alerts from big US law firms or big 4 accounting firms--remains curiously absent.  The Bureau of Economic Analysis does a survey of "US Direct Investment Abroad" every five years. In past years, if you were required to file, the BEA contacted you.

Not any more; now you are just supposed to know that the BEA exists and has its own reporting requirements, and that if you are a US person (which includes individuals), you are supposed to go and file a report to them, separate and distinct from all of of your other tax and financial asset reporting requirements. I do not know what the definition of US Person is for BEA purposes, and whether it includes US citizens and other persons, regardless of their residence--looking into that now. The definition of US Person for BEA purposes appears to diverge from that for tax purposes, such that in most cases reporting is required by those physically resident in the United States.

BEA reporting is subject to a civil penalty of $2,500 to $25,000 for nonfiling, plus $10,000, or a year in jail, or both, if the nonfiling was wilful. I am not sure who is responsible for collecting this fine but if it is the IRS (as is the case for FBAR), then I wonder why the Service doesn't bother to tell taxpayers about the form and its deadline anywhere at all on the IRS website.

A BE-10 form must be filed by any US Person that directly or indirectly held 10% or more of the voting securities ("US Reporter") of any non-U.S. business enterprise (a “Foreign Affiliate”). There are no de minimis exceptions: no matter how small your nonUS corporation might be (or have been-you must file for the year even if the corporation ceases to exist), you must report or face the penalty. US Reporters must file Form BE-10A for themselves and may have to file additional BE-10 forms for their corporations.

The deadline is tomorrow: May 29 now June 30. There is an extension available but it requires filing a request prior to the due date. Prepare for a delay in accessing that form right now--the BEA server appears to be overloaded. Possibly a request to extend filed today (if that is even possible from outside the United States) would be granted, I am not sure.

The BEA is a valuable source of information necessary for policy research, and I do not in any way object to the general need to collect information on US companies. What I object to is that again and again, US regulators seems to forget that "US Persons" includes a massive population of individuals who live permanently outside of the territory, who cannot realistically be expected to simply "know" about all the forms they are supposed to report, and who are dramatically underserved by the US agencies that continue to produce these requirements. US Persons are now potentially subject to three overlapping and duplicative reporting regimes, each with its own quirky forms, convoluted instructions, inconsistent deadlines, and heavy penalties: the IRS, the Financial Crimes Enforcement Network, and now, every five years, the BEA, all with little to no effort to educate the population each agency expects to be fully compliant.

I do wish that US lawmakers would understand that when they enact complex regulatory regimes with hefty penalties, they have a responsibility to educate the targets of that regulation. I am not talking about large, multinational conglomerates or high net worth individuals with teams of legal counsel. They are protected: their counsel's job is to keep up to date on all regulatory compliance regimes, inform their clientele, and and make money off compliance fees. I am not worried about them. I am talking about the human beings who just happen to live and work in other countries. If they have small businesses, they may well have non-US corporations in those countries where they live and work.  Regulatory agencies that seek to regulate these individuals have a responsibility to inform that is global in scope. It seems to me obviously unjust to suddenly impose complex requirements, with attendant penalties, on a whole new population without making any effort to educate them that this is the new order of things. Today's last-minute deadline extension seems to acknowledge this basic issue.

Why is the OECD so afraid of formulary apportionment?

The OECD has been rolling out a very modest version of country-by-country reporting --only really, really big companies will have to report, the info must be kept strictly hidden from public view, the info mostly won't flow to the world's poorest jurisdictions--and now, from its Feb 6 report, I see that governments must use the info they obtain only to further arms' length transfer pricing, and not to try switching to formulary apportionment:

"Jurisdictions should not propose adjustments to the income of any taxpayer on the basis of an income allocation formula based on the data from the CbC Report"

Formulary apportionment must be a pretty effective way to tax multinationals at source, if the OECD is conditioning government-to-government data flows on not using it.

The picture I am drawing from the OECD's guidelines for CBC is very troubling. If I understand this correctly, the OECD wants info to flow from all jurisdictions to the ultimate parent jurisdiction, which will then dispense info to other jurisdictions provided they have tax information exchange agreements (TIEAs) with the parent jurisdiction, and provided they keep the secrets and don't use the information to switch to formulary apportionment, even if that is a better system for them than arm's length transfer pricing.

Since most multinationals are based in OECD countries, it starts to really matter which jurisdictions have TIEAs with these countries. Indeed, these TIEAs are starting to be the world's answer to everything tax cooperation-related. This means that a country without TIEAs is very quickly finding itself out in the cold when it comes to the brave new world of tax transparency being built by the USA and the OECD.

Just taking a quick zoom in to this world, it should be noted that the United States, home to many of the world's biggest and most profitable multinationals, has very few tax agreements with countries in Sub-Saharan Africa. It is not necessarily that these countries do not want tax agreements with the United States. Many of them have requested tax agreements for many years. But only the US decides who has a tax agreement with the US.

What does this mean for a country in Sub-Saharan Africa that is the destination for a US multinational's direct investment dollars? I am afraid it means that most will continue to struggle to impose income taxes on these multinationals. They will in effect be forced to continue using arm's length transfer pricing even if it is too expensive for them to administer effectively, and even if they would prefer to use formulary apportionment. Meanwhile, they will be forced to set up complex financial asset monitoring and reporting systems to ensure they are not locked out of the global financial system by the US via FATCA or the OECD via the common reporting standard.

Yet even after doing all of that, without the requisite tax agreements in place, these countries seem increasingly likely to receive no tax information from the US or the OECD. That leaves them virtually powerless to stop tax evasion by their own residents, who may freely continue to hide their financial assets in the United States and elsewhere. It also leaves them at a serious disadvantage in addressing complex tax avoidance by US and other OECD-based multinationals.

So much for that quaint notion of "tax sovereignty" the US and the OECD are always so worried about. And so much, I think, for the notion that developing countries have an effective voice in OECD decision-making. The OECD has been very clear that it did not want to even discuss formulary apportionment, even as it purported to review the fundamental international tax structure in its BEPS project. With this latest guidance, it seems the OECD is intent on building a framework that will eliminate any possibility for future discussion for formulary apportionment, as well.

Samaha and Strahilevitz on Information policy and legal design

Adam M. Samaha and Lior Strahilevitz recently posted a paper called Don't Ask, Must Tell — And Other Combinations, which on its face looks like it has nothing to do with tax but it is relevant to questions about compliance and enforcement, so I thought it worth reading. Here is the abstract:

The military’s defunct Don’t Ask, Don’t Tell policy has been studied and debated for decades. Surprisingly, the question of why a legal regime would combine these particular rules for information flow has received little attention. More surprisingly still, legal scholars have provided no systemic account of why law might prohibit or mandate asking and telling. While there is a large literature on disclosure and a fragmented literature on questioning, considering either part of the information dissemination puzzle in isolation has caused scholars to overlook key considerations. 

This Article tackles foundational questions of information policy and legal design, focusing on instances in which asking and telling are either mandated or prohibited by legal rules, legal incentives, or social norms. Although permissive norms for asking and telling seem pervasive in law, the Article shows that each corner solution exists in the American legal system. “Don’t Ask, Don’t Tell,” “Don’t Ask, Must Tell,” “Must Ask, Must Tell,” and “Must Ask, Don’t Tell” each fill a notable regulatory space. 

After cataloguing examples, the Article gives accounts of why law gravitates toward particular combinations of asking and telling rules in various domains, and offers some normative evaluation of these strategies. The Article emphasizes that asking and telling norms sometimes — but only sometimes — are driven by concerns about how people will use the information obtained. Understanding the connection to use norms, in turn, provides guidance for a rapidly advancing future in which big data analytics and expanding surveillance will make old practices of direct question-and-answer less significant, if not obsolete. In any event, the matrix of rule combinations highlighted here can reveal new pathways for reforming our practices of asking and telling in life and law.

The authors cover taxation under the category Must Ask, Must Tell (MAMT). A highlight:

The personal income tax regime is perhaps the most familiar MAMT regime to many Americans. ... Strikingly, because it collects tax information from third parties like employers, banks, and brokerages, IRS already has much of the most important information that a taxpayer will provide on the applicable 1040. This redundancy has sparked reformers to call for replacement of the current, high-transaction costs MAMT regime with one where the government automatically calculates each taxpayer’s liability (or refund) each year and sends her a bill (or check). Notwithstanding the substantial time savings for taxpayers that such plans may entail, these proposals for reform have not been implemented. What gives?

The authors propose that MAMT might be explained by a need to resolve agency problems, which I don't really buy, and then they suggest that making people make tax declarations themselves is a way to make sure they value their citizenship or participate in democracy or make socially good choices, all notions I have heard before but cannot possibly believe when I read that the vast majority of taxpayers pay a tax prep service to help them get through their tax filing every year. Remember, the tax prep service makes money by making it so the taxpayer doesn't have to understand the form, much less the law. The tax preparation industry would definitely find it a hardship if they could not rent-seek off the complexity of tax filing. Remember California's ready return? TurboTax didn't like it.

Rent-seeking by tax compliance professionals, and the ongoing battle to keep the IRS from being able to serve taxpayers properly, are inter-connected key aspects of tax compliance and enforcement. The more hideously complex the law, the more the tax return preparer can charge for the service (I note that paying premiums to overcome tax complexity and attendant risk of error is but one reason why the US practice of treating certain nonresidents as permanent tax residents cannot possibly be fair).

The authors of this paper seem to understand the interplay between complexity and rent-seeking but they dramatically under-emphasize this in the analysis, and that is a pity. This paper barely scratches the surface of the "must ask, must tell" nature of income tax declarations, and I would have liked to have seen more discussion, especially regarding the global scope of the US tax system. But that is a lot to ask of non-tax experts. The paper concludes with a normative discussion that I am still working through, and I'm not sure if there are lessons there for taxation, or not. In any event, a novel paper that raises some interesting points about mandating the furnishing of information.