The focus of Professor Steven Dean’s most recent article, “Tax Deregulation,” in the NYU Law Review, sounds pretty straightforward. However, Dean explains in a recent podcast, “what you think may be simplification is in fact, not simplification.” He notes that tax payers like deregulation, autonomy, choice, and the ability to structure, which he argues is not simplification.
For example, simplification is a concept regulators have addressed with regard to personal income tax. One provision relates to the fact that tax payers may be required to pay a marriage penalty if they have similar relatively high incomes. To avoid paying this penalty, in the 1970’s couples would fly overseas to get a year-end divorce so that they could file as individuals. Dean argues that taking away the opportunity to get these quick divorces simplified how they filed their taxes, but it eliminated autonomy. Simplifying tax requirements therefore takes away choice, which is not necessarily better for the taxpayer.
Simplification is also a concept that relates to how businesses file their taxes. An example of tax deregulation is a recent change to a statute that governs a “tax-free devisive reorganizations.” A few years ago, Congress changed the rules, calling it simplification. However, Dean argues, this is not simplification because the law gave taxpayers the ability to structure and plan. As a result, this enhanced corporations’ ability to have more choices, which in fact makes the tax structure more complex. Dean argues that “enhancing freedom makes tax choices more complex, which is not simplification.”
Dean coins the term, “fiscal arbitrage,” which he defines as the ability of politicians to spend freely through the tax code. “There’s an ability of policy makers to spend with tax credits, tax deductions, and tax preferences in ways that they never could do through direct spending,” he says. He argues that voters have responded differently to benefits that the government provides depending on whether the benefit is defined as a tax benefit or a spending provision. For example, he says, “it is impossible to conceive that the government would write a check that matches the tax benefits a hedge fund manager would receive.” In other words, it would be inconceivable for a wealthy business person to receive a check from the government in the same amount of money that he/she receives in tax benefits, thanks to the so-called carried-interest loophole that allows Warren Buffet to pay a lower tax rate than his secretary.
“Simplification is not the cure-all that people think it is,” Dean says. “I sometimes think of the Soviet bread lines. They were quite simple but people didn’t like them very much. So if we want the Soviet bread line equivalent of a tax system I don’t think people would like it. People want choice and the ability to reduce their tax burden.”
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