Tax Policy Online (Professor Blank)

What are the four arguments in favor of tax privacy for individual tax returns? (PODS) DPOS

(D) Promote Full Disclosure - Individuals will only disclose information if they trust the gov't will keep that information private. (P) Protect Privacy - Disclosing full tax returns will expose a lot of private information to the public and potentially cause harassment and safety issues (e.g., kidnapping) --> Note - But this can be reduced by limiting disclosure to key statistics (aka pink slip). (O) Information Overload - Majority of people will not care or not understand the information. --> Note - But there are sophisticated individuals who can boil down the information, or alternatively, only require the corporation to disclose limited information (e.g., corporate pink slip) (S) Strategic Publicity - IRS can gatekeep tax enforcement information that gets released out to the public (aka hide failures but highlight success) to promote compliance and control the narrative. --> Note - But this might also be viewed as a manipulative move.

What are the six arguments against tax privacy for individual tax returns? (I C PAMS)

(I) Expose Inequity (C) Combat Corruption - (P) Public Shaming & Compliance (A) Detect Tax Abuse (M) IRS Manipulation - Nondisclosure allows the IRS to control the narrative and manipulate the masses. (S) Signal Taxpayer Honesty

What are the three tests courts use to decide whether the step transaction applies?

1) Binding Commitment Test - Court might integrate steps of a transaction if at the time of the first there is a binding agreement to do the second. 2) Mutual Interdependence - Courts might integrate steps of a transaction if the party's would never do the first transaction without the second one. 3) End Result - Courts might integrate steps of a transaction if it is clear that each step was only taken to result in a final end result.

What are the four arguments against tax privacy for corporate tax returns? (DEPI)

1) Detect Tax Abuse a) More people looking at the information increases the chance of detecting tax avoidance. --> Note - But this is not that effective since insiders, not the public, are more likely to identify tax avoidance issues. Also, if we only had a pink slip rule then there would not be enough information to detect avoidance. Therefore, whistleblower rules may be more effective on this front. 2) Evaluate Corporate Tax Policy - Taxpayers get a sense of how effective the gov't is at taxing the corporation. --> Note - But maybe less effective if following a pink slip rule b/c not enough information to fully understand the ins and outs that led to the end result. 3) Public Shaming & Compliance - Opens up the door to public shaming that can incentivize corporations to avoid abusive tax planning. --> Note - But if the pink slip rule is followed there is a risk of unjustified public shaming due to lack of having the full story. --> Note - Public perception may also be in favor of avoiding taxes. 4) Inform Investing Public - Provie shareholders, creditors, and the investing public with more information on the status of the corporation.

What are the five arguments in favor of tax privacy for corporate tax returns? (UIPBR)

1) Unfair a) Not fair to protect individual privacy but not corporate privacy --> Note - But the safety/harassment concerns for individuals does not apply and corporations do not have the same privacy rights. 2) Information Overload a) Majority of people will not understand the information --> Note - But there are sophisticated individuals who can boil down the information, or alternatively, only require the corporation to disclose limited information (e.g., corporate pink slip) 3) Proprietary Information a) Disclosure of full tax return will benefit corporate competitors by revealing important information (e.g., pay of top 25 officers, trading schedule, advertising expenses, etc.) --> Note - But this harm can be limited by only requiring the corporation to disclose limited information (e.g., corporate pink slip) 4) Benchmarking a) Taxpayers can determine how aggressive their competitors are being and match it. --> Note - But this harm can be limited by only requiring the corporation to disclose limited information (e.g., corporate pink slip) Reverse Engineering a) Taxpayers can use the vast amount of information to determine what triggers IRS audits and avoid it. --> Note - But this harm can be limited by only requiring the corporation to disclose limited information (e.g., corporate pink slip)

What is the tax privacy curtain under 6103?

Rule - Tax return information (both individual & corporate) is confidential and cannot be disclosed to the public. Historical Note - Not always confidential. There were two times in history (1862 & 1924) where tax return information was in whole or in part available to the public.

What is a Value Added Tax w/ Creidt Invoice Method?

The seller collects from the buyer a percentage of any value added to a product at every stage of the production process. Non-consumer buyer's get a credit for the tax paid, with the consumer-buyer ultimately bearing the full burden of the tax.

What are the four "carrots" that can be used to increase voluntary compliance? (LAGS) What are the four "sticks" that can be used to increase voluntary compliance? (WAPS)

Carrots 1) Link Tax to Specific Benefit (L) 2) Simplify Forms & Processes (S) 3) Grant Amnesty/Immunity (A) 4) Anticipatory Guidance/Instruction (G) Sticks 1) Withholding Taxes (automatic) (W) 2) More Severe Penalties (P) --> But offset by low audit rate 3) Increase Audit Rate (A) --> But less administrable 4) Public Shaming (S)

What is the IRS's approach to resolving the overdisclosure problem of mandatory disclosure regimes? What are the four options? Are they likely to be effective?

Currently, the IRS does nothing, but there are options. 1) OECD Threshold Approach. --> Taxpayer on required to disclose if tax is the main benefit of the transaction. --> Note - Not likely to be effective in practice b/c taxpayers will easily satisfy this (any valid business purpose). 2) Anticipatory Angel Lists --> IRS publishes a list of all transactions they do not want to know about. --> Note - Runs the risk of giving taxpayers guidance on how to structure transactions to avoid reporting. 3) Targeted Monetary Penalties --> Taxpayers who needlessly disclose are required to pay monetary fines. 4) Non-Tax Documentation[GH1] --> Require taxpayers to include non-tax documentation (e.g., emails, PowerPoints, etc.) ==> [GH1] Maybe watch the video to see what he meant by this.

What is the declining marginal utility theory and how does it relate to a progressive tax policy? What is the endowment effect?

Declining Marginal Utility 1) A taxpayer's utility for every additional dollar of income decreases, so a progressive tax system will not have a big impact on utility, and may even increase utility if the dollars are redistributed to the poor (who obtain a greater utility) Endowment Effect 1) Taxpayers value items in their possession greater than that items market value, which counteracts the declining marginal utility theory.

What is voluntary compliance? Why is it important? What are the five theories of why people voluntarily comply?

Definition --> Each taxpayer freely and voluntarily calculates their own tax liability (current US system) --> IMportant b/c its hard to audit everyone 1) Civil Obligation - Citizens who benefit from the system feel a responsibility to pay taxes. --> Note - This falls apart for citizens who think they are not benefitting from the system or if people lose patriotic fervor. 2) Non-Voluntary - Withholding taxes (e.g., employment taxes) removes ability to avoid. --> Note - Taxpayers are not as upset about the tax b/c they never see the money as theirs to begin with. Also get a tax return at the end of the year which they view positively. 3) Penalties for Non-Compliance - Potential fines or jail time for non-compliance. --> Note - This theory is discounted heavily due to the very low chance of being audited. 4) Reciprocity - People will contribute to a common goal if everyone else is also doing it. --> Note - This requires the IRS to foster an image that the majority of people comply (i.e., the tax gap) b/c this theory falls apart if people think other people are getting away with not paying. 5) Signaling - Tax compliance is a way to signal to others you are honest and not a cheat. --> Note - This theory falls apart for the most part b/c tax information is private. Also, some people may view tax avoidance as a positive signal.

Is using a cash-back system to achieve progressivity an efficient tax system? (+)(+)(-)

Fairly Efficient 1) Higher tax rates for the rich and less of an ability to avoid tax (game the system) will result in more revenue, but it still disincentivizes taxpayers to earn money or consume. (+) More Revenue (Tax Base) (+) More Compliance (-) Disnentivize Money (at margins)

Is using graduated tax rates to achieve progressivity a simple tax system? (+) (+) (-)

Fairly Simple 1) Graduated rates are easy for taxpayers to understand and easy to change, but there may be some complexity in designing the various rates and exceptions that could lead to loopholes (+) Flexible (+) Transparent (-) Complexities w/ Loopholes

What are the three attributes of an ideal tax system? What are the sub-categories of each?

Fairness 1) Vertical Equity --> TP's who make more money pay more tax 2) Horizontal Equity --> Similarly situated TP's pay the same in tax. Efficiency 1) Maximize Revenue 2) Increase Utility/Happiness 3) Neutral on Taxpayer Behavior 4) Minimize Deadweight Loss 5) Impacts Targeted Taxpayers Simplicity 1) Low Cost of Enforcement - Cost of enforcement/audit is less than revenue. 2) Easy to Understand/Comply 3) Minimal Loopholes - Not overly complex so as to create technicalities.

Why is a tax justified under liberalism? What is a liberalists ideal tax policy?

Goal 1) Tax is justified as a way to benefit the worst-off individuals in society and provide basic liberties to all. Ideal Tax Policy 1) Tax rich people at higher rates and redistribute the revenue to the worst off in society (aka poor people).

Why is a tax justified under libertarianism? What is a libertarians ideal tax policy?

Goal 1. Tax is justified to protect property rights from being unjustly held, acquired, or transferred. Ideal Tax Policy 1. Only impose a tax if the taxpayer consents or receives a direct benefit from the tax such as police force, military, judicial system, etc.

What are two possible ways to achieve a progressive tax system?

Graduated Tax Rates 1) Impose tax brackets that increase the tax rates with income. Cash-Back System 1) Impose a flat tax rate for all taxpayers and then make cash-back payments to achieve a progressive tax rate.

What is the happiness paradox and how does it relate to a progressive tax system?

Happiness Paradox 1) Taxpayers happiness is dependent on comparison with others, so by taxing rich people more than poor people and thus reducing the wealth disparity, the comparison will not be so stark and happiness will increase.

What is the income tax? What is income? Two Types? What is a consumption tax? What is consumption? Four Types??

Income Tax 1) An income tax uses income as the tax base. --> Income = Consumption + Change in Wealth (I.e., Savings/Capital Income) --> W/ Realization w/ Capital Gains --> W/ Mark-to-Market Consumption Tax 1) Definition - A consumption tax uses consumption as the tax base. --> Consumption = Income - Change in Wealth (I.e., Savings/Capital Income) --> Cash Flow w/ QA --> Cash Flow w/ Prepayment --> Sales --> VAT

What is an income tax w/ a mark-to-market system? 5 Benefits? (LBBWC) 3 Negatives? (LVT)

Income Tax w/ Mark-to-Market System 1) Taxation on any changes in wealth on a year-to-year basis. Benefits (+) No Locked-In Effect (+) No Bunching Effect (+) Less Impact on Taxpayer Behavior (+) No Unfair Benefit to Wealthy (+/-) Less Complex Negatives (-) Liquidity Issue (-) Valuation (-) Tough Transition

What is an income tax w/ the realization requirement and capital gain? 6 Benefits? (DV LIDS) 5 Negatives? (LBCWB)

Income Tax w/ Realization Requirement Taxation on any changes in wealth is deferred until a relation event occurs, with preferential rates for long term capital assets. Benefits (+) Easy to Value Change in Wealth (+) No Liquidity Issue (+/-) TP Deferral & Reinvestment --> Negative for Gov't (+/-) TP Deferral & Inflation --> Negative for Gov't (+) Offsets Lack of Inflation Tracking (+) Incentivizes Savings Negatives (-) Locked-In Effect --> Maybe offset by CG (-) Bunching --> Maybe offset by CG (-) Complex (Netting, CG) (-) Unfair Benefit to Wealthy (Borrowing/CG) (-) Changes Taxpayer Behavior

What is a sales tax?

Indirect consumption tax where TP has to pay the vendor a percentage of the retail cost of goods when purchased, and the vendor pays that tax to the gov't. --> Tax Base = Money Spent on Taxable Goods

What is integration? What are six methods to accomplish integration?

Integration is the idea of collapsing the double tax regime into a single tax. 1) Flow-Through Treatment for Corp. -- Treat Corp same as partnership. 2) Dividends Paid Deduction -- Corp gets a deduction for any dividends paid to SH. 3) Zero Out Dividend Tax Rate -- SH tax rate on dividends is 0% 4) Dividends Received Deduction -- Individual SH's get a deduction for any dividends received. 5) Shareholder Credits -- SH pays taxes on dividend, but receives a tax credit equal to what the Corp paid in taxes on that dividend. 6) Partial Integration -- Give SH partial credit for taxes paid by Corp or a lower rate (e.g., 20%) on dividends.

What are three ways to combat tax shelters? Sub-categories?

Judicial Doctrine 1) Sham Transactions --> Never occured 2) Substance Over Form --> One thing on paper, another in reality 3) Step-Transaction --> Multiple steps are actually one General Anti Abuse Rules (GAAR) 1) Codification of Economic Substance --> If relevant, no meaningful change in economic position, and only purpose to avoid tax. --> Strict liability penalty (20% if disclosed or 40% if not) Reporting Regulations --> Soled Proposal (Cash) --> Red Flag DIsclosure Laws (Domestic) --> FATCA (Foreign)

Are mandatory disclosure regimes fair? Efficient? Simple? Fairness - 2 (+)(+) Efficiency - 1 (+) Simplicity - 2 (-)(-)

Likely Fair 1) Disclosure of information improves compliance and makes it more fair for everyone. (+) Compliance = Fairness Likely Efficient 1) Better disclosure increases compliance, resulting in higher revenue. Not Very Simple 1) Overdisclosure makes it hard for the IRS to administer and identify tax shelters. (-) Overdisclsoure - Hard to administer (-) Overdisclosure - Hard to identity abuse

Is the corporate tax fair? (-)(-)(+)

Likely Not Fair 1) Most of the tax avoidance/shelters are available to the wealthy, which imposes higher taxes on the rest of society. Also, the corporate tax is a flat rate which is regressive. However, it may regulate corporate power. (-) More Tax Shelters for Rich (-) Flat Rate (Regressive) (+) Might Regulate Corp Power

What are the two reasons tax shelters are hard to combat?

Low Likelihood of Detection 1) TP's are not actively breaking the laws 2) TP's actions don't necessarily raise red flags unless seen in the right context. Ad Hoc Regulation 1) Gov't can only punish taxpayers after the fact.

What is the tax policy analysis for a VAT w/ CIM? Fair (+/-)(-) Efficient (+)(+) Simple (+)(+)(-)

Might be Fair 1) Assuming the wealthy consume more, it could potentially be progressive. However, this also depends on what goods are subject to the tax (luxury v. necessity). Also, there is a flat tax rate which is regressive. (+/-) Wealthy Might Consume More (-) Flat Tax Rate More Efficient 1) Gov't will still collect a portion of the tax if someone bails along the chain. Also, avoiding the tax requires distasteful or painful methods (black market, changing habits, etc.). (+) Minimize Loss (+) Distasteful to Cheat More SImple 1) Easy to understand and change. Less complexity from trying to make sure people participate b/c non-consumer buyers have an incentive to collect the tax b/c they'll get the credit for what they paid. (+) Clear (+) Flexible (+) Self-Enforcing

What is the tax policy analysis for a sales tax? Fair (+/-)(-) Efficient (-)((-)(-) Simple (+)(+)(-)

Might be Fair 1) Assuming the wealthy consume more, it could potentially be progressive. However, this also depends on what goods are subject to the tax (luxury v. necessity). Also, there is a flat tax rate which is regressive. (+/-) Wealthy Might Consume More (-) Flat Tax Rate Not Efficient 1) Taxing specific goods causes taxpayers to buy less or leave the market, and potentially incentivizes suppliers to avoid collecting the tax to have a competitive advantage. (-) Incentivizing Black Market/Cash Transactions (-) Creates DWL (-) Non-Participating Vendors Fairly Simple 1) Easy to understand and change, but hard to apply and choose which items are subject to it. 1. (+) Clear 2. (+) Flexible. (-) Hard to Apply

Is using graduated tax rates to achieve progressivity an efficient tax system? (+)(-)(-)

Not Very Efficient 1) Higher tax rates for the rich theoretically result in more revenue, but it also disincentivizes taxpayers to earn money (at least at the margins) and can lead to tax avoidance behavior. (+) More Revenue (-) Disnentivize Money (at margins) (-) Incentivize Tax Avoidance

Is using a cash-back system to achieve progressivity a fair tax system? (+)(+/-)(-)

Not Very Fair 1) It imposes higher rates for higher-income taxpayers, but the brackets are not necessarily an accurate measure of economic wealth and the initial flat rate may pose liquidity issues for poor taxpayers. (+) Higher Rates for Rich (+/-) Imperfect Measure of Economic Status (-) Liquidity Problems for Poor

Are regressive tax systems fair? Efficient? Simple? Fair (-) Efficient (-)(+) Simple (-)(-)

Not Very Fair 1) Rich people are getting taxes less. --> (+) Opposite of Vertical Equity Arguably Efficient 1) Lower rates for the rich results in less revenue, but it also incentivizes making money. --> (-) Less Revenue from Rich --> (+) Incentivizes Money Probably Not Simple 1) Creating new varying rates is a headache and it will likely create further opportunities to cheat the system. --> (-) Change Old System --> (-) Complex Rules

Are progressive tax systems fair? Efficient? Simple? Fair (-) Efficient (+/-)(+/-) Simple (+)(+)(+)

Not Very Fair 1) Rich people are getting taxes less. --> (+) Opposite of Vertical Equity Arguably Efficient 1) Taxing the rich at the same rate will collect more revenue relative to a regressive rate but less than a progressive. However, there would be no incentive to make more or less money. --> (+/-) Relatively Less Revenue from Rich --> (+/-) No Incentive on Money Probably Simple 1) Rates are easy to understand, easy to change, and no variations make the system simple (so less loopholes) --> (+) Flexible --> (+) Transparent --> (+) Simple

What are the 3 pros of the GAAR? (USC) What are the 4 cons of the GAAR? (HIBO)

PROS 1. Uniformity --> More uniform application of economic substance doctrine 2. Serious Signaling --> Codification signals to the taxpayers that IRS is taking this more seriously. 3. Congressional Rules --> Congress made the rule, not the courts. CONS 1. Option to Opt Out (O) --> Potentially unfair or inconsistent use. 2. Too Broad (B) --> Discourage otherwise good business 3. Ineffective Penalties (I) --> Not high enough to take into account audit rate. 4. Overly Harsh (H) --> Lack of good faith exception and multiple ways to be punished.

2 reasons why don't we have sales tax and vat tax on federal level?

Political Pushback from State & Local Gov't 1. State & local gov't are politically opposed b/c they worry a federal sales tax would put pressure on them to reduce or abandon their sales taxes. Risk of Ballooning Rates 1. There is a concern that the rates in a sales tax are too easy to manipulate, resulting in higher and higher taxes.

What is a cash flow consumption tax w/ prepayment method? What is the comparison between taxpayer and gov't? Why don't we have this type of system?

Prepayment Method 1) TP has to include all earnings upfront, but does not need to include any withdrawals from qualified accounts. --> Tax Base = Yearly Earnings Taxpayer 1. (+) Avoid paying taxes on future gains 2. (-) No deferral of tax payments Gov't 1. (+) No deferral of tax payments (money now) 2. (-) No benefit from taxpayer's profitable investments Tough transition

Is using graduated tax rates to achieve progressivity a fair tax system? (+) (+/-)

Probably Fair 1) On paper, the progressive rates impose higher rates on higher-income taxpayers. However, in practice, richer taxpayers may actually have a lower effective rate after factoring in the realization requirement, deductions, capital gains rates, etc. (+) Higher Rates for Rich (-) Imperfect Measure of Progressivity

Is the corporate tax efficient? (-) (+/-)

Probably Not Efficient 1) Although it arguably increases revenue, this is uncertain given the many ways to avoid the tax. Also, it highly distorts taxpayer behavior (choice of entity, retained earnings, debt financing, tax shelters, disguised dividends). (-) Distorts Taxpayer Behavior (+/-) Might Increase Revenue

Is the corporate tax simple? (+)(+/-)(-)

Probably Not Simple 1) Although the flat 21% rate is easy to understand and theoretically easy to change, actually changing it would be difficult. Also, the laws surrounding the corporate tax are complex and allow for tons of tax shelters. (+) Transparent (+/-) Flexible (Arguably) (-) Complex (Loopholes)

Broadly speaking, is an income tax fair? (+)(-) Efficient? (+)(-) Simple? (+)(-)

Probably not fair 1) Taxing changes in wealth should theoretically be progressive, but in practice rich people are sophisticated and avoid taxes on wealth. (+) Progressive in Theory (-) Regressive in Practice Fairly Efficient 1) Adding changes in wealth increase the tax base (increase revenue), but it also disincentives savings (+) Increased Tax Base. (-) Incentivize Immediate Consumption Relatively Simple 1) The existing structure is an income tax, so sticking with it is the easiest. However, there is complexity relating to the timing of taxing wealth (realization v. mark-to-market)

What is the problem with trying to increase voluntary compliance by imposing more sever penalties? What is the proposed solution by Raskolnikov? Downsides to this proposal?

Problem 1) Low Audit Rate Requires Too High of Penalties Raskolnikov Proposed Solution 1) Self-Adjusting Penalty --> The penalty for over reporting deductions is to take a percentage out of the legitimate deductions. It's self-adjusting because....NEED TO REWATCH VIDEO AND UPDATE THIS. --> Only applies to deduction b/c underreporting income is easier to catch due to withholding reports Downsides 1) This may incentivize auditors to waste time ripping apart completely legitimate deductions.

What is the problem/challenge related to combatting domestic tax shelters? What is the current reporting regulation solution? What is the policy analysis of that solution?

Problem/Challenge --> Many tax shelters are objectively legal, so nothing stands out to put the IRS on notice. Current Solution - Red Flag Disclosure Law 1) TP's and their material advisers have a legal obligation to keep track of and report: --> List of Specific Transactions --> Transactions of Interest --> Confidential Transactions --> Contractual Protection --> Significant Tax Losses Policy Analysis --> The only problem I see with this approach is that it is reactive, rather than proactive.

What is the problem/challenge related to foreign bank accounts? What is the current solution? What is the policy analysis of that solution (3 things)?

Problem/Challenge 1) Taxpayers use foreign bank accounts to avoid disclosure and shelter income. Current Solution - Foreign Account Tax Compliance Act (FATCA) 1) Participating Foreign Financial Institutions (FFI) must report account information of any account held by a US person and withhold 30% of certain payments from non-cooperative account holders. Non-cooperating FFI's are subject to 30% withholding tax on certain US source income. Policy Analysis (-) Privacy Conflict (-) Extraterritorial Bullying (+) Very Effective --> The policy has been very effective and led to many countries adopted a similar regime developed by the OECD or entering into bilateral agreements with the US.

What is the problem/challenge with the cash economy? What is Soled's proposed solution? What is the policy analysis of that solution (3 things)?

Problem/Challenge 1). The cash economy is basically untraceable and provides taxpayers with ample opportunities to not report income (as shown by the tax gap numbers). Proposed Solution (Soled) 1) Require customers who pay in cash to report their payments to the IRS. Policy Analysis (-) Burdensome for customers to keep records. (-) Burdensome for IRS to audit and keep track of customer reporting. (-) Require additional policies to incentivize (either carrot or stick) customers to report.

What type of tax policy is this? A makes 20k and pays 2k in taxes B makes 200k and pays 60k in taxes

Progressive A = 10% effective tax rate B = 30% effective tax rate

What is a progressive tax system? What is a regressive tax system? What is a proportionate tax system? What is the formula for calculating effective tax rate?

Progressive 1) Taxpayer's with a higher income are taxed at a higher effective rate. Regressive 1) Taxpayers with a greater income are taxed at lower effective rates. Proportionate 1) Taxpayers are taxed at the same effective rate regardless of income. Effective Tax Rate 1) Tax Rate = Taxes Paid / Taxable Income

What type of tax policy is this? A makes 20k and pays 4k in taxes. B makes 200k and pays 40k in taxes

Proportionate A = 20% effective tax rate B = 20% effective tax rate

What is a cash flow consumption tax w/ qualified account method? What is the comparison between taxpayer and gov't? Why don't we have this type of system?

QA Method 1) Direct consumption tax where TP has to include all earnings and withdrawals from a qualified account, but does not have to include any earnings they put into a qualified account. --> Tax Base = Yearly Earnings + QA Withdrawals - QA Deposits Taxpayer (-) Have to pay taxes on all gains withdrawn in future (+) Benefit of deferring tax till later time. Gov't (+) Benefit from taxpayer's profitable investments (-) Defer payment of tax. Tough transition

What type of tax policy is this? A makes 20k and pays 4k in taxes B makes 200k and pays 20k in taxes

Regressive A = 20% effective tax rate B = 10% effective tax rate

Broadly speaking, is a consumption tax fair? (+) Efficient? (+)(+)(+)(+) Simple? (-)

Relatively Fair 1) Getting rid of the realization requirement makes for a more fair system. (+) Less Wealthy Tax Shelters Very Efficient 1) Not harm savings and get rid of all distortions from realization and mark-to-market system. (+) No Distortion of Savings (+) No Realization Requirement (+) No Valuation Issues (+) No Liquidity Issues Not Simple 1) Implementing this brand new system would be hard, but it might be less complex which would mean less loopholes (-) Difficult Transition (+) Less Complex (No Loopholes)

What is the statutory definition of a tax shelter? What is the common speech definition? What is the difference of tax evasion and tax avoidance?

Statutory Definition - § 6662(d)(2)(C) --> A tax shelter exists if there is: 1) a plan or arrangement that 2) has the significant purpose of avoiding tax. Common Speech Definition --> A tax shelter is a facially legal deal or transaction done by very smart people that, absent the tax consequences, would be very stupid. Tax Evasion --> Avoiding or reducing tax liability illegally via intentional fraud Tax Avoidance --> Avoiding or reducing tax liability legally.

What is the tax gap formula? What is the net compliance rate? What is the biggest issue contributed to the tax gap?

Tax Gap = Tax IRS Should Be Collecting - Tax IRS Actually Collects Net Compliance Rate = 83.7% i. Note - Misleading stat b/c it does not include illegal income Biggest Issue = Under Reporting Individuals ($387 Billion) i. Tax Shelters ii. Cash Economy iii. False Deductions iv. Inflating Basis of Property

What is the publics perception of tax shelters? What are the three possible reasons for this perception?

Tax avoidance strategies are not viewed negatively in the US. Three possible reasons include: 1) Game v. Law-Breaking --> If Corp follows the law and succeeds in reducing tax liability, they win. If the courts shut them down or they break the law, they lose and have to pay. This is seen as a game where winning is good and losing is bad. 2) Benefit to Taxpayers --> Many of these Corp make up TP's portfolios for retirement, and thus tax avoidance benefits TP's in the long run. 3) Positive Signal to Shareholders --> A Corp's willingness and ability to find tax loopholes signals to SH's that the Corp is worth investing in.

Why is a tax justified under utilitarianism? What is a utilitarian's ideal tax policy?

Tax is justified to maximize the aggregate utility for as many people as possible. Ideal Tax Policy 1) Tax rich people at higher rates and redistribute the revenue to maximize overall utility (not necessarily poor people)

How can a tax impact TP behavior? What is deadweight loss? What is the impact on taxpayer behavior and DWL if a tax is imposed on an elastic good? Inelastic good?

Taxpayer Behavior 1) Influence taxpayers to buy less of a good or switch to a new good entirely. DWL 1) Number of people who no longer consume or sell an item b/c of the tax (which results in no income at all). Tax on Elastic Good 1) Bigger impact on TP behavior 2) Bigger DWL Tax on Inelastic Good 1) Lower impact on TP behavior 2) Lower DWL

What are the five factors the IRS looks at to identify tax shelters?

The IRS looks for suspicious activity such as: 1) Weird Timing of Transactions 2) Large Avoidance of Tax 3) Large Creation of Loss 4) Suspicious Arrangements w/ Consultants (e.g., confidentiality, money back guarantees, etc.) 5) Only Purpose for Transaction Was Avoiding Tax

What are the two types of Tax incidence? What is the harberger model? What is your theory?

Two Types 1) Nominal --> Person who pays the tax (i.e., Corp) 2) Economic --> Person who bears burden of tax (i.e., cannot be Corp) Harberger Model 1) In the long run, all holders of capital across the economy (i.e., everyone who invests in both corporate and non-corporate entities) bear the burden of the corporate tax by receiving a reduced return on capital. My Theory 1) I think it is uncertain, but likely a combination of a. Shareholders (less dividends) b. Laborers (lower wages) c. Consumers (higher prices)

Is using a cash-back system to achieve progressivity a simple tax system? (+)(+)(+)

Very Simple 1) Taxpayer know the rates, the IRS can easily change the rates, and a flat tax is super simple with not a lot of room for loopholes. (+) Flexible (+) Transparent (+) Not Complex

What are the four factors required for "public shaming" to be effective at increasing tax compliance?

i. Participating Audience ii. Shame-Sensitive Offenders iii. Clear & Accurate Procedures iv. Reintegration Process