Samuel D. Brunson

Grown-Up Income Shifting: Yesterday’s Kiddie Tax Is Not Enough

In 1986, concerned that wealthy parents were sheltering some of their income from taxes by giving some portion of their securities portfolios to their children, Congress enacted the “kiddie tax,” which taxes a child’s passive income at the child’s parents’ tax rate. By doing so, Congress intended to reduce tax-motivated income-shifting. Since its passage, however, there has been little serious consideration of whether the kiddie tax successfully prevents the targeted income-shifting.This Article reexamines the kiddie tax and concludes that it is both over- and underbroad. The kiddie tax subjects all of a child’s passive income, not just income resulting from tax-motivated income-shifting, to her parents’ higher tax rates, which distorts children’s saving and investing decisions. At the same time, the kiddie tax does nothing to prevent the transfer of appreciated property to children, itself a significant means of income-shifting. The Article concludes that, in order to more effectively prevent income-shifting while at the same time reducing its distortions on non-abusive decisions, the kiddie tax needs to grow up. A grown-up kiddie tax would apply only to income a child earned on assets received as a gift at her parents’ rate; all other income would be taxable to a child at her own rate. At the same time, the kiddie tax would be triggered based on when a child received the asset, not when she realized income. By replacing the current kiddie tax with the grown-up kiddie tax, the tax law will have better tools to police against income-shifting.

The U.S. as Tax Haven? Aiding Developing Countries by Revoking the Revenue Rule

Over the years, many OECD countries, including the United States, have identified tax havens as a significant problem, and have acted to limit the ability of their taxpayers to use tax havens to reduce their taxes. The United States has implemented tax regimes, including subpart F and the passive foreign investment company rules, and disclosure regimes, such as the recently-enacted FACTA rules, to prevent U.S. taxpayers from taking advantage of tax haven jurisdictions. But the intersection of a number of U.S. tax rules, it turns out, makes the United States an attractive place for foreigners to invest — and hide — their money. Principal among these is the revenue rule, an eighteenth-century common law rule that prevents the United States from recognizing and enforcing foreign tax judgments. As a result, if a foreign taxpayer hides money in the United States and fails to pay taxes at home, her government has no recourse to satisfy the tax debt with the taxpayer’s U.S. assets. Such hidden money disparately impacts developing countries by reducing their ability to finance government through developing tax infrastructure, and instead forcing them to remain dependent on foreign aid.The revenue rule stands in stark contrast to the general default rule that U.S. courts will enforce foreign final judgments. But the revenue rule is not grounded in any compelling policy considerations. Moreover, to the extent that the U.S. revokes the revenue rule, not only will the U.S. aid other countries — including, especially, developing countries — but it may receive reciprocal aid in collecting taxes from U.S. taxpayers with assets held overseas. This Article argues that the U.S. should revoke the revenue rule, both from a moral obligation to aid developing economies in becoming self-sufficient and to receive reciprocal aid in collecting taxes being held overseas.

Education Reform and Cross-Sectoral Financing: A Practice-Based Approach

Recently, the for-profit sector has dramatically increased its market share in the education market. Although many students who otherwise would not have received an education have benefited from this trend, there are worrisome aspects to this development. Evidences suggests for-profit education frequently fails to serve the best interest of its students. Also, for-profit education fuels the focus of public discourse on only the short- and medium-term economic benefits of education, at the expense of longer term benefits to society. One reason the long-term benefits of education tend to be ignored is because they are hard to measure. Short-term economic value is easy to quantify, and it is a value about which there is broad-based consensus among key decision makers. Public value, in contrast, is harder to measure and harder to agree on. Most theoretical frameworks tend to reinforce this shortcoming by assuming, for example, that individual, utility-maximizing agents have pre-given preferences in a relatively static institutional environment. We challenge these assumptions by focusing on a meso-level conception of practices that mediates the relationship between dynamically conceived entities — namely, macro-level institutions and micro-level individuals. Inspired particularly by Alasdair MacIntyre, we present a theory of practices built from the ground up on managerial decision-making practices. In doing so, we uncover the practical mechanisms by which myopic economic values crowd out public values. Legal structures reinforce a strict boundary between for-profit and nonprofit institutions, effectively reinforcing the weaknesses of each: for-profit institutions have good access to financing, but drive out public values; nonprofit institutions foster public values, but fail to find sufficient financing. Legal reform can address these problems by encouraging collaborative financing efforts in a way that is sensitive to the strengths and weaknesses of each sector. Low-profit limited liability companies (L3Cs), for example, offer a way for nonprofit stakeholders and for-profit investors to collaborate, but there are dangers in bringing these different sectors together. Cross-sectoral legal reform must therefore prevent economic interests from co-opting other, public-values-based practices. This could be done, for example, by placing limits on the payouts or take-over provisions of for-profit investors can receive. This would prevent economic, profit-maximizing incentives from dominating the culture of mission-driven institutions, while still allowing mission-driven stakeholders to access financing in ways that are currently not possible.