A conversation with five Fordham Law professors about tax law
Complicated and little understood, the U.S. tax code is the subject of endless public debate, a perennial topic of political campaigns, and, of course, a necessary burden that every American must grapple with each year. With the recent passage of a new tax bill, hundreds of pages of new provisions have been added to an already arcane regime. Fordham Lawyer spoke with five professors who specialize in tax law—Jeffrey Colon, Constantine Katsoris ’57, Rebecca Kysar, Elizabeth Maresca, and Linda Sugin—to discuss the recent changes and what they mean for us as individuals and as a society.
What are some aspects of the new tax legislation that concern you, and why?
Sugin: I am concerned about the distributional effects of the new law; the legislation gives massive tax cuts to the rich in so many ways. I am also concerned about the social policies implicit in the law, which can help explain why the legislation is so unfair. The legislation signals a preference for “traditional families” with a single breadwinner and a stay-at-home spouse, compared to single adults with children. It privileges capital income over labor income. It treats individuals as autonomous and disconnected from each other rather than as connected in community with mutual obligation. I just published an essay in the Yale Law Journal Forum about the social meaning of the legislation that argues that we need to make the values embedded in the tax law explicit if we are going to succeed in having a more just tax law.
Colon: One of the inequities that was introduced is in Section 199A, which allows a deduction for people who earn certain kinds of business income. First of all, it doesn’t cover employees. So if you and I do the same thing—you as an independent contractor, I as an employee—and we receive the same income, you may be eligible for this 20 percent deduction since you’re an independent contractor. But if you happen to work in certain unfavored areas—for example, law, accounting, medicine—you’re eligible for the deduction only up to certain limits. I don’t think we’ve ever had provisions in the tax code that taxes compensation differently depending on your employment status and the industry you’re working in. Now we do, and there is just no rational tax policy reason for this distinction.
Kysar: NYU Law Professor Daniel Shaviro last year called Section 199A maybe “the single worst proposal ever prominently made in the history of U.S. federal income tax.” I would agree with that. It’s just terrible tax policy to choose different industries. But I also think there’s a huge general problem with the legislation in terms of revenue losses. We had tax reform in 1986. That was revenue neutral, but this new tax bill was originally supposed to increase the national debt by $1.5 trillion. Now the Congressional Budget Office has revised that figure to $2 trillion. At some point, we have to pay for that by cutting spending or increasing taxes, and that’s a difficult choice to make. There’s no free lunch.
Maresca: I have something positive to say about the tax bill. In the Federal Tax Clinic that I direct, we represent low-income taxpayers. An issue we’ve been seeing for years, and that we have been advocating to change, relates to student-loans discharges. If you become disabled you are eligible for a student-loans discharge. Before the new tax law, this discharge unfortunately came with a tax bill, which obviously you can’t pay because you are disabled and no longer working. We worked for many years with outside organizations to try to get that law changed so that people wouldn’t be taxed on their student loan disability discharge. That change ended up in the new tax law. Now if your student loans are discharged because of a disability, you no longer have to pay income taxes on that loan discharge. That was one really positive thing.
Katsoris: I think more attention has to be paid to the plight of the elderly to help stem the disturbing rise in the rate of bankruptcies among seniors. As they age and leave the workforce, their income—to the extent available—usually depends upon pensions and investments, exposing them to the risks of market fluctuations and inflation. In addition, as part of the aging process, their medical expenses usually increase dramatically. In 2019, these expenses are deductible as an itemized deduction to the extent they exceed the threshold amount of 10% of their adjusted gross income. Perhaps if we lowered or eliminated this 10% threshold amount for seniors, it would be a small step in easing their burdens of coping with advanced age. Another area that needs further attention is the burning issue of excessive student debt. Merely suggesting that all higher education be free is no solution, for it is fiscally impractical. Perhaps a more realistic solution might be a broad-based quid pro quo exchange wherein free or subsidized graduate tuition is conditional upon the rendering of a couple years of public service after graduation. Moreover, the present limit (and phaseout) on the deductibility of student loan interest is downright insulting. Interest on student loans should be fully deductible.
People often mention loopholes when they talk about ways to reduce their tax liability. Is that term useful in discussions about tax law?
Kysar: A lot of the gamesmanship in the current system I think occurs by multinational corporations. They are shifting money from one pocket to the other through the existence of related corporations, and that’s something that’s been very difficult to police. In my area of scholarship, that might be one example of a loophole. But I agree with Jeff; it’s hard to define what a loophole is. A lot of people and corporations that have low tax rates—that’s an explicit choice that Congress had made to bestow upon them
Do you believe our tax system is fair to the average taxpayer? If not, how can our tax code be made more equitable?
Kysar: It’s a complicated question that depends on your theory of distributive justice and what expectation of the tax system you have. That also depends on if you are more liberal or more libertarian. We do have a level of inequality in our society that many people are concerned about, and taxes are used to redistribute resources. One view, however, is that we already do a lot of redistribution through our tax system and maybe it’s time to start doing more through the spending side of it—that is, building more government programs, investing in infrastructure; these types of initiatives might give people jobs while also funneling resources to people in need. So you can look at the tax system in isolation, but I think it’s also wise to think about the spending side of things too.
Sugin: Yes, Rebecca has the right idea. You have to think about the fiscal system as a whole. The tax system collects the money, but that is only half the story. We need to focus on how it is spent to determine whether the system is fair overall. The United States has a very small fiscal system compared to other countries—the public sector is small, compared to GDP. So we are very limited in our ability to achieve progressivity on the spending side of the budget. We depend on the income tax for progressivity, and it doesn’t do a very good job with it. The realization rule means that the income tax ignores asset appreciation, which is a huge source of income accumulation. The preference for capital gains means that people with investments, who are wealthier than people without investments, are taxed at lower rates if they ultimately realize their gains. The tax treatment of borrowing allows taxpayers to enjoy consumption that isn’t taxed at all. We don’t tax wealth, but we do tax payroll. The payroll tax is a regressive tax, which means that the effective rate goes down as income rises above the payroll tax cap. Every person who works pays the payroll tax. We are funding entitlements like the Social Security system out of the payroll tax, but there’s no theoretical reason why we have to connect those things. We tax the income from working much more heavily than we tax the income from capital. That is not fair to the average taxpayer who earns wages but has no capital income.
Colon: Who is the average taxpayer? Do you look at income, median income, average income? Should,
say, upper-middle-class people be paying more or less? We have all these different ways of encouraging certain activities, such as capital investments. That’s why we have a lower rate for capital gains, which mostly benefits very-high-income taxpayers. We now have a very high exemption amount for gift and estate taxes; it’s now $22.4 million for a couple. That’s even before you start doing any planning, so for the average taxpayer, there’s no gift and estate tax. To the average taxpayer, they truly pay zero on capital gains. But the fact is that we have this system that has a lower rate regardless of your income and the benefit goes to the highest-income taxpayer. Those are things that are somewhat concerning.
Maresca: The majority of American taxpayers are wage earners. They have no control over how much tax they pay. They can’t engage in tax planning to reduce their tax bill; they simply pay the amount of tax the government says they owe. They don’t have deductions other than, usually, their children or maybe their home. In some sense, the tax law is simple for them. A large majority of people don’t even itemize their deductions. It used to be that one in three taxpayers itemized; now it’s only one in seven. Those other six out of seven are just paying the taxes that they owe, and that’s it. Many of them have a higher effective tax rate than wealthier Americans. Does that seem fair and equitable to you? People who are able to game the system are not the average American.
Katsoris: Shaping a tax code that is fair to all may be an impossible dream, for it depends on what part of the country you are in—but we must never stop trying. I agree with Rebecca that we should not only concentrate on the revenue-raising side of taxation—after all, the revenue pit is not bottomless—but we must also focus on the spending side. Some additional thoughts to be considered in seeking a goal of fairness: if someone is in need and incapable of caring for themselves, assistance should be provided; if one is able-bodied, they should be willing to contribute something back to society in the form of services; the sustainability of tax revenue depends upon a healthy economy; taxes that discourage incentives are self-defeating in the long run; compassion for others should be an ever-present theme. I could go on, and some of these goals may overlap from time to time. I do not, however, subscribe to the theory that all income is the same and therefore should be taxed the same. Some 50 years ago, the Fordham Law Review published my article titled “In Defense of Capital Gains,” which inter alia pointed out that capital gain investments carry with them the risk of loss. Ironically, if a net capital gain is recognized by an individual, it is usually taxed immediately; yet if the taxpayer loses their investment, the recognition of their loss (absent offsetting capital gains) is basically limited to a deduction of $3,000 per year. At that rate, it could take years to recoup that loss, if ever. Is that fair? As for using the tax code to achieve wealth redistribution, it sounds great and compassionate, but be careful what you ask for. Before embracing that concept in an all-inclusive way, run it by your grandmother or grandfather, who worked and saved all their lives to amass a retirement income to remain independent during their declining years.
What are some of the things that the government is doing to influence people to behave
in a certain way through the tax code?
Sugin: The tax law is all about influencing behavior. All that taxes can do is change the price of things. For example, the tax code makes homeownership, charitable giving, and education cheaper than they would otherwise be. Employers provide health insurance because the tax law makes it cheaper if they do. There are so many decisions that we don’t necessarily think of as economic that the tax law affects. I always tell my students that they shouldn’t get married (or divorced), have children, or die without considering the tax consequences. As it has become more difficult for Congress to pass legislation of all sorts, the tax law has increasingly become the repository of federal policies, whether related to revenue or not.
Kysar: Economists would say that for the most part it’s really unfortunate that our tax system selects and privileges certain industries over others. Real estate is very much privileged in the current code, perhaps even more so after the recent changes. That causes people to overinvest in real estate when they could be putting their money to higher and better uses. Another thing to point out is that the tax code sometimes explicitly tries to incentivize activities in an intentional manner. Other times, the tax system is incentivizing people to behave in a certain way, but unintentionally. For instance, the confluence of progressive rates, taxing families as a unit, and taxing similarly situated families equally creates a marriage penalty or marriage bonus depending on your situation. That’s not an explicit choice that Congress is making.
Colon: The question is should we be using the tax system to favor housing, because what happens is that it certainly provides a subsidy, but then that subsidy gets reflected in a higher housing price, right? It encourages people to buy a house, but what happens is everyone knows that they get a deduction for mortgage interest, so that causes prices to rise. A lot of that benefit gets competed away by a rise in price.
Katsoris: Some tax incentives are laudable—for example, a tax break for adoption expenses or to encourage energy conservation—but some measures are counterproductive. I was brought up with the idea that buying a house is a great investment and to be encouraged for a variety of reasons. Now, by imposing a cap on the deductibility of state and local taxes, the government is forcing many seniors—not just the wealthy—to relocate away from their relatives, friends, and roots because they can no longer afford to remain in their present residence. Unfortunately, the exodus is only the beginning. Regardless of what politicians think, taxes can make people move.
Maresca: One thing that is incentivized for many Americans is retirement savings; for example, setting up and contributing to an IRA or having a retirement account with your employer. Congress specifically incentivizes retirement savings because you pay no taxes on the income you put into your retirement account. The taxes aren’t paid until much later, when you retire and take withdrawals. But again, that’s not something every wage earner can afford. Even though that option exists, a lot of people unfortunately can’t take advantage of it.
How would you grade politicians in terms of how they talk about taxes? What do they miss? How can they talk about it more accurately or honestly?
Kysar: There’s a lot that’s missed in the political discourse. Politicians always talk about the tax burden
and how it’s too much. There’s an emphasis on too many taxes but not as much emphasis on what people are getting back from the government.
Maresca: What I hear a lot is that the tax code needs to be fair and efficient. Efficient means you don’t spend a lot of money to collect taxes, but fair means something different to every person. They use this term “fair,” but what does that mean? My fair might be different from your fair. Whenever they say that, I always wonder how do they define “fair.”
Colon: I think complication is a red herring. When people rail against our tax system and say it’s complicated they mention the tax code and how much it has grown. First of all, maybe it has actually improved. The detailed regulations that have been issued are needed to make the system administrable. It covers a wide, very complicated, hypercomplex economy and all its attendant market transactions. It’s what Congress has decided. Regulators have to issue a lot of regulations because Congress, in essence, has punted the ball to them and said, Here’s what we want this statute to say, but now you have to write the regulations to make sure that it works.
Kysar: I think the recent legislation was sold to taxpayers in part on this idea that it will reduce your tax burden and you’ll be able to file on a postcard. I think that’s wrong on a couple of different levels. One, related to what Jeff said, is about how the problems of complexity in our tax code are not about a number of lines on a form. It’s trying to define, for instance, what income is. Second, there are a bunch of schedules you now have to fill out in order to file on a postcard. I think some simplification was achieved, but it has certainly been oversold by politicians.
Katsoris: All politicians love to sloganeer that they are in favor of tax cuts. But unfortunately, their actions often hide the real truth. For example, increasing the standard deduction and at the same time eliminating or limiting deductions is not a net tax deduction to many middle-income taxpayers—nor is placing a cap on the deductibility of state taxes, eliminating miscellaneous tax deductions, limiting the deductibility of interest on a home mortgage, eliminating personal exemptions, et cetera. In short, truthfulness and transparency would be appreciated.
Sugin: I would say the biggest problem is that politicians act like they never have to pay for anything. We collect less in taxes than we spend, so we borrow to make up the difference. That’s why the deficit is growing. I think we need to be more thoughtful about how we’re going to strike that balance ultimately. I’m agnostic about deficit spending because sometimes it makes sense to borrow. But I think that we need to be honest about what deficit spending means—that our children and our grandchildren will ultimately pay for what we are buying today. That’s OK if we are investing in the future in a way that improves the world for them. But if we destroy the planet and leave them the bill, I think we fail in the moral obligations that we have to future generations.