True Tax Research Articles

Designing a Billionaire's Tax

With ProPublica’s dramatic revelation in 2021 of the low “true tax rates” of America’s billionaires serving as a catalyst, the exclusion of unrealized gains from the base of the federal income tax has been challenged to an extent unprecedented in the century-plus history of the tax. In late 2021, a proposal by Senate Finance Committee Chair Ron Wyden (D, OR) to tax billionaires’ unrealized gains in tradable assets might have become law, but for the opposition of Senator Joe Manchin (D, WV). And in early 2022, the Treasury Department of President Joe Biden included a minimum tax on the unrealized gains of the ultrarich in its tax reform proposals. A narrower reform, taxing billionaires who borrow against unrealized appreciation to finance lavish consumption expenditures, has also been urged. All three of these proposed reforms—but especially the first two—would transform the fundamental character of the income tax as applied to the wealthiest Americans. This Article describes the three approaches, considers design challenges under each and evaluates their relative merits.

Executives’ income tax burden, earnings management and stock reduction

This paper selects companies that implemented equity incentives during 2011–2021 as a research sample, and delves into how executives avoid personal income tax burden and alleviate the pressure on tax-paying funds through earnings management and stock reductions. The results of the study show that as the amount of executives' true tax burden increases, the proportion of shares they reduce their holdings in the six months prior to the unlock date increases accordingly. In addition, the proportion of executives who reduced their holdings was significantly higher in the group with higher tax collection intensity than in the group with lower collection intensity. These findings are important for understanding the impact of executive tax behavior and tax collection policies.

On the Issue of Business Property Taxation

The article explores changes in the definition of taxable objects, the tax base, and the dates when property taxes from legal entities are due. There is a brief overview of the history of origin of property taxes, their formation and development. The authors looked into the order of accounting of taxation objects related to the property of organizations, including real estate and vehicles; analyzed property tax revenues to the budget system of the Russian Federation; and considered some issues of identifying objects of taxation and transitioning to calculation of the business property tax based on the cadastral value of real estate, as well as difficulties of determining whether certain property could be attributed to real estate objects. Real estate becomes subject to taxation only if it is registered in the Unified State Register of Real Estate (EGRN). In practice, however, organizations could own property that is not required by law to be registered in the EGRND, thus the taxpayer could be at risk of failing to pay a true tax liability. In this regard, it is mandatory to take into account taxation of not only real estate, but also movable property. This practice was used in the Soviet Union, when calculating fees for production assets, and in the Russian Federation as well. Such a change will increase revenues to the regional and local budgets and solve the problem of taxation of real estate objects that do not have cadastral value.

Offshore tax evasion and wealth inequality: Evidence from a tax amnesty in the Netherlands

Exploiting unique datasets covering over 29,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. Tax evasion is concentrated at the top of the wealth distribution with over 10% of the wealthiest 0.01% of households – the “super rich” – evading taxes. At the top, households evade around 8% of their true tax liability. The “merely rich” (P90-P99.9) own 67% of hidden wealth, while the “super rich” account for only 7%. Consequently, the correction for offshore wealth has a modest effect on top wealth shares. We describe a number of explanations for the distribution of tax evasion by Dutch households: low-cost tax evasion opportunities in neighbouring countries for the “merely rich”, sophisticated forms of tax evasion for, low effective tax rates on and migration to low tax jurisdictions by the “super rich”. Taken together, these explanations suggest that the distribution of tax evasion strongly depends on a country’s geographical and institutional settings.

The Promise and Limitations of Information Technology for Tax Mobilization

Abstract Tax revenue in many low- and middle-income countries is inadequate for funding investments in public goods and human capital. With high levels of informality and limited state capacity, many tax authorities have difficulty determining the true tax base and collecting taxes efficiently and equitably. Tax authorities are increasingly adopting new technologies to improve administrative processes, reduce taxpayer compliance costs, and enhance their overall effectiveness. This paper reviews the recent literature on the use of technology for tax administration. It highlights the potential of technology to improve tax collection by helping to identify the tax base, monitor compliance, and facilitate compliance. It also identifies possible limitations to the use of technology arising from inadequate infrastructure and connectivity, lack of adoption or resistance by taxpayers and tax collectors, lack of institutional mainstreaming, and an unsupportive regulatory environment.

Tax-Aware Portfolio Construction via Convex Optimization

We describe an optimization-based tax-aware portfolio construction method that adds tax liability to standard Markowitz-based portfolio construction. Our method produces a trade list that specifies the number of shares to buy of each asset and the number of shares to sell from each tax lot held. To avoid wash sales (in which some realized capital losses are disallowed), we assume that we trade monthly and cannot simultaneously buy and sell the same asset. The tax-aware portfolio construction problem is not convex, but it becomes convex when we specify, for each asset, whether we buy or sell it. It can be solved using standard mixed-integer convex optimization methods at the cost of very long solve times for some problem instances. We present a custom convex relaxation of the problem that borrows curvature from the risk model. This relaxation can provide a good approximation of the true tax liability, while greatly enhancing computational tractability. This method requires the solution of only two convex optimization problems: the first determines whether we buy or sell each asset, and the second generates the final trade list. In our numerical experiments, our method almost always solves the nonconvex problem to optimality, and when it does not, it produces a trade list very close to optimal. Backtests show that the performance of our method is indistinguishable from that obtained using a globally optimal solution, but with significantly reduced computational effort.

The Tax Gap's Many Shades of Gray

The “tax gap”—the difference between the amount of “true tax” and the amount of tax actually paid—has garnered widespread attention in recent months. Much of the commentary on the subject equates the tax gap with “tax evasion,” a term broadly understood to connote intentional (and potentially criminal) underreporting. This paper cautions against conflating the tax gap with tax evasion. The tax gap includes substantial gray areas where the law is ambiguous and the IRS’s determination of “true tax” is debatable. On top of that, the IRS’s methodology for measuring the tax gap includes upward adjustments that are recommended by front-line examiners but reversed on administrative appeal or judicial review. Moreover, a substantial portion of the estimated tax gap is derived from a statistical technique called “detection controlled estimation” that potentially magnifies the impact of later-reversed recommendations on the ultimate tax gap measure. Weighing in the opposite direction, the IRS’s approach to measuring the tax gap excludes some amounts that clearly constitute tax evasion (most significantly, underreporting of tax on illegal-source income). Understanding the tax gap’s shades of gray can inform discussions of tax law and policy. We explain how proposals to use the tax gap as a performance target may produce perverse incentives for the IRS. We further explain how additional IRS funding—though necessary to improve the agency’s ability to enforce the tax laws—may have counterintuitive effects on the estimates of the tax gap. We also illustrate—using examples from the taxation of passthrough entities—how legislative reforms can reduce the size and scope of legal gray areas that contribute to the tax gap. Our analysis highlights the importance of increased IRS funding levels and substantive tax law changes as complementary strategies for improving tax compliance.

Tax Evasion Detection with FBNE-PU Algorithm Based on PnCGCN and PU Learning

Tax evasion is an illegal activity in which individuals or entities avoid paying their true tax liability. It has always been a crucial issue for both governments and academic researchers to efficiently detect tax evasion. Recent research has proposed the use of machine learning technology to detect tax evasion and has shown good results in some specific areas. Regrettably, there are still two major obstacles to detect tax evasion. First, it is hard to extract powerful features because of the complexity of tax data. Second, due to the complicated process of tax auditing, labeled data are limited. Such obstacles motivate the contributions of this work. In this paper, we propose a novel tax evasion detection framework named FBNE-PU, a multi-stage method to detect tax evasion in real-life scenarios. In this paper, we perform an in-depth analysis of the characteristics of the transaction network and propose a novel network embedding algorithm, the PnCGCN. It significantly improves detection performance by extracting powerful features from basic features and the tax-related transaction network. Moreover, we utilize nnPU to assign pseudo labels for unlabeled data. Finally, a MLP is trained as the decision function. Experiments on three real-world datasets demonstrate that our method significantly outperforms the comparison methods in the tax evasion detection task.

Towards a true tax reform: Proposal to reactivate the economy. Towards real tax reform: Proposal to revive the economy

Every one that proposes and publishes a tax reform renews the hope of good news or at least that the situation does not worsen, this year 2020 did not happen, which is not new. The current government promised not to raise taxes, which is also new. While it is true that the Federation Revenue Law for FY 2020 does not provide for the increase in tax rates, it does show the eventual creation of new contributions, a situation that has gone unnoticed by the majority of the population, moreover, of the fervent followers of the person now holding the Presidency of the Republic. Thus, this reform tightens the audit but does not encourage job creation or the preservation of existing ones; 2019 ended without economic growth and that does not seem to matter to this regime, indolent of an economic crisis in the wake of today's pandemic. That is why the proposals for improvement must come from individuals, from the civil society which, though belittled by authority, must take the baton, now distracted and empty; the gravity of the situation deserves it, it claims.

FIXING FIVE FLAWS OF THE TAX CUTS AND JOBS ACT

The tax legislation commonly referred to as the Tax Cuts and Jobs Act (Public Law 115-97) came into effect in 2018. The new tax law was flawed in five important ways. First, the law generates large deficits that will reduce the ability of the government to fund important priorities in the future; these deficits also risk justifying a more tepid fiscal response to the next recession. Second, after more than 35 years of increasing income inequality, the tax law moves the tax system in a regressive direction. Third, while the legislation increases economic efficiency in some ways, it decreases economic efficiency in other ways, moving the tax system away from optimal design principles. Fourth, the legislation misses an opportunity to combat profit shifting by multinational companies, changing the character of the problem but leaving its scale largely undiminished; also, the law provides new incentives for the offshoring of physical investment. And fifth, the legislation introduces new sources of complexity. This paper explains these five flaws in detail, setting the analysis within the context of relevant literature and facts. Thereafter, the paper suggests both short term and more fundamental ways to reform the tax code. Nearly immediately, simple fixes can address most of the TCJA flaws. Moving forward, a true tax reform can modernize the tax system to better handle the challenges posed by economic inequality, climate change, and the global nature of business activity.

True and Fair View and Tax Accounting

Accountants, and to a lesser extent also (tax) lawyers, have been arguing for decades now on the content and practical consequences of the True and Fair View Principle. This papers tries to demonstrate that: i) True and Fair View is nothing different from what lawyers already know under different names (teleological interpretation, analogy and anti-abuse rules); and ii) Not all contents of True and Fair View must have a consequence in tax accounting.

Using a Cost of Capital Where One Really Shouldn't

Myers (1974---‘M74’) derives the Cost of Capital (CC), including the corporate-tax subsidy on borrowing, for a one-period investment project. From Miles and Ezzell (1980), this CC remains valid in multiperiod projects provided that, during the project's life, debt is continuously re-aligned with ex post GPVs. In contrast, when the debt schedule is static --- i.e. set to stabilise leverage ex ante only --- no CC works outside the Modigliani and Miller (1963---‘MM63’) perpetuities scenario; one generally needs a recursive Adjusted NPV (rANPV). Real-life leverage being neither fully static nor fully dynamic, two questions arise: (i) do M74's CC and rANPV produce very different valuations in a static/multiperiod problem?, and (ii) is it useful to heuristically adopt a non-linear interpolation between the M74 and MM63 polar CCs? We find, first, that M74's CC is is (mildly) conservative but vastly less biased and more precise than MM63's. Second, two of the heuristic compromise CCs are marginally more correct than even M74, but they remain biased upwards. Remembering that M74 also applies when debt is GPV-indexed ex post, M74 seems the safer procedure. Highlights: – With a ‘static’ debt schedule set to stabilise leverage ex ante, a finite-life project’s risk cannot be constant, so no Cost of Capital (CC) can work perfectly. – When expressed as fractions of gross present value, minor-looking CC-based valuation errors largely reflect the low PV of the true tax shields rather than a precise assessment. – The Myers (1974) one-period cost of capital (CC) is mildly conservative and works very well for multiperiod NPV-ing even when debt is static. – The Miller-Modigliani CC for perpetuities, when applied in finite-life problems, is vastly overoptimistic and imprecise, especially when the CC takes into account growth. – We also propose four heuristic procedures that non-linearly interpolate between the above two CCs. The two that take into account the changing risk do succeed in beating Myers’ CC, but the gains are small and the bias is upward rather than conservative.

Fixing the Five Flaws of the Tax Cuts and Jobs Act

The tax legislation commonly referred to as the Tax Cuts and Jobs Act (Public Law 115-97) came into effect in 2018. The new tax law was flawed in five important ways. First, the law generates large deficits that will reduce the ability of government to fund important priorities in the future; these deficits also risk justifying a more tepid fiscal response to the next recession. Second, after more than 35 years of increasing income inequality, the tax law moves the tax system in a regressive direction. Third, while the legislation increases economic efficiency in some ways, it decreases economic efficiency in other ways, moving the tax system away from optimal design principles. Fourth, the legislation misses an opportunity to combat profit shifting by multinational companies, changing the character of the problem but leaving its scale largely undiminished; also, the law provides new incentives for the offshoring of physical investment. And fifth, the legislation introduces new sources of complexity. This paper explains these five flaws in detail, setting the analysis within the context of relevant literature and facts. Thereafter, the paper suggests both short term and more fundamental ways to reform the tax code. Nearly immediately, simple fixes can address most of the TCJA flaws. Moving forward, a true tax reform can modernize the tax system to better handle the challenges posed by economic inequality, climate change, and the global nature of business activity.

Escape from the USA: Government debt-to-GDP ratio, country tax competitiveness, and US-OECD cross-border M&As

Statutory tax rates of a country do not reflect a country’s true tax competitiveness, we propose and show that government debt to GDP ratio (GOVDEBT) of a country is a better proxy for its tax competitiveness. Using a comprehensive sample of 1,884 completed cross-border acquisition transactions from the U.S. to other OECD countries, we document that the U.S.- target country GOVDEBT difference is significantly and positively related to both deal announcement return and post-deal tax saving of the acquirer. The GOVDEBT difference is also significantly and positively related to U.S.-target country deal flow. The findings remain robust when we control for the potential endogeneity of GOVDEBT difference. Our findings strongly suggest that tax avoidance is an important driver of U.S.-OECD cross-border deal flow and it increases shareholder wealth for U.S. acquirers.

La primera reforma tributaria en la historia de la humanidad

El presente acápite trata acerca del relato milenario de la primera reforma social, descrito por Noah Kramer, en el libro La historia empieza en Sumer, y que ha sido traducido por el autor directamente de las tablillas sumerias. El artículo presenta un apólogo, sobre el contexto en el cual se dio esa primera reforma social, que sin lugar a dudas fue una verdadera reforma tributaria en favor del pueblo. El texto comienza describiendo las características de la civilización sumeria, el entorno geográfico en el cual se desarrolló, sus invenciones como la escritura, la rueda, la cerveza, la organización del comercio, los sistemas políticos y los sistemas tributarios y aduaneros. Es en medio de ese auge que los sumerios terminan siendo dominados por los Acadios. Cabe anotar que en el contexto descrito en el párrafo anterior se hace alusión a que una ciudad prospera como Lagash en tiempos de los sumerios, termina empobreciendo a sus habitantes con una exagerada y desordenada carga tributaria y un sistema tributario caótico en manos de los Acadios. Es en este testimonio que se realizó una de las primeras reformas sociales, que por sus características es considerada como la primera reforma tributaria de la cual tiene conocimiento la humanidad.

Judging the New International Tax Regime: Testimony Before the U.S. Senate Committee on Finance

The 2017 tax law made significant changes to the way the United States taxes multinational corporations on their cross-border income. The new legislation has, however, failed to solve old problems in the international system and also opened the door to new ones.The serious problems created, or left unaddressed, by the new regime, include the following: (1) The new international rules aimed at intangible income incentivize offshoring and largely preserve the profit shifting problem; (2) the new patent box regime will likely not increase innovation, causes WTO problems, and can be easily gamed; (3) the new inbound rules have too generous thresholds and can be readily circumvented; and (4) the new regime falls short of true international tax reform. This is the author's written testimony before the U.S. Senate Committee on Finance, at an April 24, 2018 hearing on the recent tax legislation.

Do Behavioral Nudges in Prepopulated Tax Forms Affect Compliance? Experimental Evidence with Real Taxpayers

Defaults, in the form of prepopulated fields within the tax form, have been identified as potential mechanisms that tax authorities can use to reduce noncompliance. They achieve this by simplifying the process of filing taxes, thus reducing the scope for errors. However, defaults may increase the scope for evasion if set incorrectly. The authors report experimental data on the effect of correct and incorrect defaults. They find that prepopulating tax returns is a worthwhile policy only if it is done with highly reliable information. Setting default levels that underestimate taxpayers’ true tax liability leads to significant drops in compliance and tax revenue. The authors also study whether nudges that contain messages with descriptive norms about compliance can mitigate the adverse effect of prepopulated returns with incorrect values. Nudges that react to inputs from the taxpayer effectively raise compliance, whereas static nudges do not. This result demonstrates the limits to the applicability of nudges in a public policy sphere as well as possible adverse effects resulting from poor implementation.

Extrinsic and Intrinsic Motivations for Tax Compliance: Evidence from a Field Experiment in Germany

We study extrinsic and intrinsic motivations for tax compliance in the context of a local church tax in Germany. This tax system has historically relied on zero deterrence so that any compliance at baseline is intrinsically motivated. Starting from this zero deterrence baseline, we implement a field experiment that incentivized compliance through deterrence or rewards. Using administrative records of taxes paid and true tax liabilities, we use these treatments to document that intrinsically motivated compliance is substantial, that a significant fraction of it may be driven by duty-to-comply preferences, and that there is no crowd-out between extrinsic and intrinsic motivations. (JEL C93, D64, H26, H71, K34, Z12)

Talents, Types and Tags. What is the Relevance of the Endowment Tax Debate?

The academic debate on taxation of endowments or 'talents' is misguided in several respects. Following John Rawls and Ronald Dworkin, it tends to over-emphasize the 'slavery of the talented' problem. As a result, it ignores that a full-fledged endowment tax, if feasible, would offer a sizeable tax cut to all high-income earners. Of course, a true endowment tax is not practicable: the distinction between individuals' 'endowments' and their 'choices' finds very limited support in the social sciences. But the debate on endowment taxation has generated something useful. It does point at identifiable sources of economic inequality, such as labour market discriminations, that might well be considered relevant to the distribution of the tax burden.

Income Taxation and Risk-Taking

A true income tax is conventionally considered unable to burden the returns to risk-taking. The theory is that investors respond to the tax by increasing the amounts they invest in assets delivering risk-based returns. If the increased investment makes money, the enlarged return covers the associated tax liability; if it loses money, the enlarged deduction cushions the loss.This paper argues that the conventional view is mistaken. Investors generally will be unable to increase their investments to compensate for the tax, implying that the government collects revenue to the extent returns to risk-bearing are positive. Apparently contrary results derived in the general equilibrium literature are due to the unrelated (and generally unwarranted) assumption that the government operates under a budget constraint incompatible with its retention of revenues from the tax on risky returns. The argument is significant in light of the important ramifications of the conventional view.