The Shelf Project:About
From The Shelf Project
The Shelf Project: Revenue-Raising Projects that Defend the Tax Base
Calvin H. Johnson*
I. Putting Ideas on the Shelf
Congress needs to have some well developed projects on the shelf when it is ready to raise revenue. If it does not have developed projects to work with, it will raise the revenue with whatever is available. Late in the legislative consideration of the Tax Reform Act of 1986, for example, the congressional staffs were looking for revenue sources to make it possible to reach a 25% maximum individual tax rate. The staffs had already scoured the Code for deductions to repeal and they were still short. Congress then adopted a five-percent surtax, phasing out personal deductions and low tax brackets. The five percent phase-out tax created a bubble in tax rates under which moderately well-to-do taxpayers paid a marginal rate that was five percentage points higher than the rate imposed on the truly wealthy. There is no economic distinction between just imposing a higher marginal tax rate and a phase out tax, except that the phase out tax is more complicated and creates a tax-rate bubble. The exemptions for dependents that were targeted by the surtax, moreover, are not loopholes because it takes considerably more than the amount of the exemption ($3,400 in 2007) to raise a kid. No one has a child to get a dependent exemption. In the light of day the phase-out tax proposal was considered a gimmick. The surtax was adopted, however, because it was the only thing left on the shelf.
If there are many good ideas on the shelf, by contrast, then Congress can do some good and defend the tax base as it raises revenue. Section 469, the limitation on passive activity losses, for example, was key to the success of the Tax Reform Act of 1986 because it ended tax shelters as they were then known and balanced the revenue given up by cuts in the maximum tax rate. Section 1561, enacted in the Tax Reform Act of 1969, ended decades of massive litigation over whether a single corporate group could benefit from many sets of low corporate tax brackets. Section 382, enacted in its reworked form in the Tax Reform Act of 1986, ended trafficking in NOLs that had also gone on for decades.
Good shelf projects sometimes take years to develop. It took years of tinkering with section 1561 and section 382 before the remedies held water. Section 469 had to be repaired to handle passive income generators, then more commonly known as “PIGs.” Development on proposals that Congress will adopt in 2009 or 2010 needs to be started now. Congress will need to think about raising revenue. Repeal of the alternative minimum tax (AMT) would cost $668 billion over 10 years. “Temporary” rate cuts that Congress adopted in 2001-2005 will expire on December 31, 2010. Taxpayers do not generally know that their current tax rates are just a loaner, not written to be permanent. Just maintaining the “temporary” tax cuts will take $300 billion a year. If the cuts are maintained and AMT is just managed, then Congress will be faced with over $4 trillion of toxic deficits over the coming decade. Under pay-as-you go budgeting, moreover, Congress must raise revenue to spend or give tax incentives for the benefit of constituents. Constituent demands do not stop. It would be a mistake to predict when Congress will turn to revenue raising, but the revenue need is coming.
The projected $4 trillion needed over a decade is a serious number, but not a terrible number. It is only $400 billion a year. There is a lot of money in loopholes. The tax expenditure budget identifies some departures from income. I would venture that the economy as a whole would be better off if a substantial fraction of those tax expenditures were ended. There are industries and transactions that are undertaxed. Consumption tax norms would tell us to go after interest deductions, consumed capital gains and monetarization of assets with built-in gain. There are many opportunities for negative tax in our current tax law, and a zero tax rate is plausibly the lowest that tax on investments should go. Indeed, if The Shelf Project can come up with many good and effective ideas, it can help bring maximum tax rates down lower than they have been.
The need for revenue can drive tax reform. Our tax base has eroded. The tax base is assaulted daily by talented tax planners and constituent-demanded legislated exceptions to tax. A good tax base is firm, level among choices, and unavoidable. In our tax system, harmful loopholes abound. The tax base is in terrible health, as measured by how little people are willing to pay for straight-forward tax-exemption. Investors now need to pay and are willing to pay only about five percent of interest to avoid tax with municipal bonds. Municipal bonds compete directly or indirectly with all investments, so low implicit tax on those bonds shows that effective tax rates are low on all investments.
It has been over 20 years since the Tax Reform Act of 1986, when Congress last undertook a serious attempt to repair the tax base. The tax base is like an Ark on which we all depend. If the tax base is going to hold water, it must be repaired.
The best tax systems have low rates, but are unavoidable. With avoidable taxes, even a small tax rate causes taxpayers to flee. The worst tax systems have high rates in theory, but have planning gimmicks, exemptions and negative tax for easy substitutes. A loophole-ridden system like ours is a lose-lose situation. Taxpayers do themselves damage avoiding the tax and the government collects little revenue.
The coming revenue needs are a precious window for the defense of the tax base. Factors that helped tax reform in the past are no longer available. The Tax Reform Act of 1986, for instance, was driven by substantial cuts in maximum tax rates that could balance the revenue from anti-tax shelter reforms. Before 1981, tax brackets were not adjusted for inflation and Congress’s need to return the inflation revenues then lubricated adoption of anti-loophole tax reforms. This time, it will be the need for revenue that will have to drive the protections of the tax base. When Congress needs revenue, it is a rare opportunity to fill in the loopholes. The need for revenue is an opportunity for tax reform that must not be squandered.
If Congress raises revenue just by raising tax rates, that would be lost opportunity. An increase in tax rates raises the damage that tax does. The tax-caused deadweight loss rises with the square of the increase in tax rates. Raising rates captures those who are in the tax base, to the cackling delight of those who are not. Going after loopholes can raise revenue from the right people and also make the tax system more efficient. Congress needs to have a range of good ideas it can pull off the shelf when it becomes ready to raise revenue.
Projects should also follow the dollars. As wealth becomes more concentrated, tax needs to go where the money is. Dollars are more valuable in poor hands because the poor have so few dollars that they use them for the most desperate needs. The rich certainly value their dollars and they are very hard to tax. Still if a person has $50 billion in wealth, there is a restricted amount of love and attention that can be given to any one dollar. If a dollar is needed to pay for the marines or close the deficit, it does less harm to the sum of human happiness to take the dollar from the top tier of wealth. Moral people now work to shift the tax burden upward. Congress can shift the tax burden upward, raise revenue, lower marginal tax rates, make tax easier and more efficient, and reduce the damage caused by taxes, all at once, just by going after loopholes.
The Treasury Department is the traditional originator of the big tax reform acts. Treasury studies led the way for the Tax Reform Act of 1969 and the Tax Reform Act of 1976. In 1984, the Treasury Department published a study, usually called Treasury I, which was the precursor to the Tax Reform Act of 1986. If the Treasury Department were today preparing for the coming revenue needs, then the Treasury would be the repository for tax-improvement ideas. In the absence of Treasury activity, the tax community has to fill in.
The Shelf Project, described here, will support the work of the congressional tax staffs. The U.S. Congress Joint Committee on Taxation has the statutory duty to study and report to Congress on the tax system. In prior reforms, the staff of the Joint Committee has played a pivotal role. In recent years, the staffs of the House Ways and Means Committee and Senate Finance Committee have become important sources of technical support. The Congressional Budget Office gives important technical support and its biennial list of budget options include revenue raising ideas. The congressional tax staffs, however, are sometimes overwhelmed. The tax community should support them with projects that chase the money, support the tax base and raise revenue.
At some point in the future, it may be necessary to shape many different proposals into an overall package with political legs, but in the initial stages, shelf projects need to be pure tax policy, correct on the merits, whether or not they have political appeal.
The tax community that develops shelf projects can not know nor control when Congress will look for revenue. The tax community can not know what proposals Congress will adopt. But at least Congress should have access in the coming years to sound projects that support the tax base.
II. Drawing Upon the Tax Community
The Shelf Project will collect and nurture the development of ideas protecting the tax base. Proposals on The Shelf Project must raise revenue, support the tax base, reduce tax-caused harm and follow the money. The proposals should also simplify the tax law and strengthen its rationales. Often what is needed to make the tax system simple and administrable is a brilliant idea. There is a great deal of talent in the tax community willing to help make their tax law better.
A. Format
A standard format helps readers understand what to expect. A shelf project should be presented in a form that imitates a Committee Report. The Committee Report format allows a very efficient description of current law, what it wrong with it and how it would be changed. The format of a proposal should, therefore be as follows:
1. Current Law. This section should describe the details of current law that would be affected by the proposal and should have cites to authority.
2. Reasons for Change. This section should explain why current law needs to be changed.
3. Explanation of Provision. This section describes the proposal, beginning with an overview and most important aspects of the proposal. Any exceptions to the reach of the proposal should be discussed.
4. Technical Analysis (if needed). This section explains technical details of the proposal and may be especially needed if the details would get in the way of explaining the main thrust of the proposal in the Explanation of Provision section.
5. Notes to Help the Revenue Estimator. Revenue estimates are critical to the bargaining over tax proposals. Certified revenue estimates are conducted by the Joint Committee on Taxation, and shelf project proposals will have no certified revenue estimates attached to them. An author's notes on revenue estimates, however, can help readers understand the project and see if it a big proposal or a narrow one. For some projects, the range of possibility might be from $1 million to $100 billion, with not much more specificity.
B. Subject Matter Segments
The Shelf Project web site will be subdivided into eleven subject matter segments:
1. Individual Income Tax (including Marriage Penalty and Earned Income Credit)
2. Tax Accounting
3. Consumption Tax Initiatives
4. Foreign Tax
5. Financial Instruments and Institutions
6. Business Entities (including Partnerships and Corporations)
7. Tax-Exempt Organizations
8. Pensions and Deferred Compensation
9. Estate, Gift and Generation Skipping Transfer Taxes
10. Excise Taxes
11. Tax Procedure
III. Tools of The Shelf Project
The Shelf Project has three basic tools: (a) a “wiki,” allowing anonymous participants to create and improve projects, (b) a circulation of proposals among experts, and (c) publication of polished proposals in Tax Notes magazine.
A. The "Wiki"
There is a website, www.taxshelf.org, that will allow the tax community to develop projects on line collaboratively. Wikipedia has proved to be an interesting experiment in which a very broad group of people add expertise and editing to encyclopedia entries, and the broad participation allows Wikipedia to cover information that a small group of experts would never have the time to cover. The Shelf Project wiki will be a new experiment for the tax policy community.
To participate in the wiki, the proposals must support the mission of The Shelf Project. They must raise revenue, defend the tax base, reduce tax-caused harm and chase the money. Participants should have some tax expertise. Tax community members are expected to participate as individuals, representing themselves sincerely and not representing any client or institution which they may be affiliated. But if any participant will obey our laws, the participant is welcome to the community.
Participants in The Shelf Project wiki can propose or shape shelf projects anonymously. Indeed, the debates leading to the adoption of the United States Constitution in 1787-88 were conducted largely via pseudonyms in newspapers and pamphlets. The norms of the time required it. The governing ideal was that “[error would never prevail] though supported by dignified names" and that [truth would be victorious,] "though it comes from a cottage." It was considered illegitimate to add the weight of name or family to the pure logic of the arguments. There is also no reason to confuse sincere personal belief and one’s day job. Members of the tax community can participate in the shelf project speaking for themselves alone, just as one speaks sincerely and in privacy in the voting booth and in personal prayer.
B. Circulation Among the Experts
Some of the best tax lawyers in the country have agreed to assist with The Shelf Project. When the overall shelf project is fully developed, each of the eleven subject matter segments will have two managers who are experts in the areas and a review committee to help. The managers will decide whether the proposals are consistent with the goals of The Shelf Project and have technical merit enough to recommend them. Every segment of The Shelf Project will have a review committee consisting of experts who will look at projects, circulating drafts among themselves. Each segment is an independent kingdom managed separately in its own way. I would expect each segment to develop separately.
As of today, the following people have agreed to serve on The Shelf Project within the eleven segments. The segments are listed roughly in the order of how well developed the review committees are, which reflects serendipity and some accidents of my schedule and the schedule of those who are helping. The order does not reflect a judgment about the importance of the area to the tax system or to Congress. We expect to fill in the empty spots as The Shelf Project develops.
1. Financial Instruments and Institutions
Managers:
Stevie D. Conlon (Arlington Heights, IL, lead author, Principles of Financial Derivatives)
Reed Shuldiner (University of Pennsylvania Law School)
Review Committee:
Dale S. Collinson (KPMG, Washington, DC)
Michael Farber (Davis Polk & Wardwell, New York)
David C. Garlock (Ernst & Young, Washington, DC)
Viva Hammer (Crowell & Moring, New York)
Jeffrey W. Maddrey (PricewaterhouseCoopers, Washington, DC)
David S. Miller (Cadwalader, Wickersham & Taft, New York)
Erika W. Nijenhuis (Cleary Gottlieb Steen & Hamilton, New York)
William M. Paul (Covington & Burling, Washington, DC)
Steven M. Rosenthal (Ropes & Gray, Washington, DC)
2. Foreign Tax
Managers:
Reuven S. Avi-Yonah (Michigan Law School)
Charles I. Kingson (NYU Law School (adjunct))
Review Committee:
Peter C. Canellos (Wachtell, Lipton, Rosen & Katz, New York)
Robert H. Dilworth (McDermott, Will & Emery, Washington, DC)
Joseph H. Guttentag (former Deputy Assistant Secretary for International Tax Affairs, Treasury)
Stephen E. Shay (Ropes & Gray, Boston)
Eric M. Zolt (UCLA Law School)
3. Business Entities
Managers:
Christopher H. Hanna (SMU Dedman School of Law)
Lawrence Lokken (University of Florida Levin College of Law)
Review Committee:
Joseph Bankman (Stanford Law School)
Karen C. Burke (University of San Diego School of Law)
Jasper L. Cummings, Jr. (Alston & Bird, Raleigh and Washington, DC)
Thomas L. Evans (Kirkland & Ellis, Washington, DC)
Deborah A. Geier (Cleveland-Marshall College of Law)
David P. Hariton (Sullivan & Cromwell, New York)
Jeffrey L. Kwall (Loyola Law School, Chicago)
E. Daniel Leightman (Gardere Wynne & Sewell, Houston)
J. Mark McWatters (HBK Capital Management, Dallas)
Samuel Olchyk (Venable, Washington, DC)
Michael L. Schler (Cravath Swaine & Moore, New York)
John P. Steines, Jr. (New York University School of Law)
4. Tax Accounting
Managers:
Robert M. Brown (Retired Partner – KPMG; former IRS Associate Chief Counsel for Income Tax & Accounting)
Joseph M. Mikrut (Capitol Tax Partners, Washington, DC)
Review Committee:
Sheldon S. Cohen (former Commissioner of IRS, Washington, DC)
Thomas L. Evans (Kirkland & Ellis, Washington, DC)
Thomas A. Luxner (former Branch Chief Income Tax & Accounting, Chief Counsel, IRS, Washington, DC)
Annette B. Smith (PricewaterhouseCoopers, Washington, DC)
5. Tax Procedure and Compliance
Managers:
Bryan T. Camp (Texas Tech Law School)
T. Keith Fogg (Villanova Law School)
Review Committee:
Les Book (Villanova Law School)
Danshera Cords (Capital University Law School)
Steve Csontos (Former Legislative Counsel, Department of Justice Tax Division)
William Elliott (Dallas)
Steve R. Johnson (University of Nevada- Las Vegas Law School)
Gerald Kafka (Lathan & Watkins, Washington, DC)
Leandra Lederman (University of Indiana- Bloomington Law School)
Tom Meyerer (Ernst & Young, Washington, DC)
Christopher M. Pietruszkiewicz (LSU Law School)
Phil Pillar (Greenberg Traurig, Philadelphia)
Chris Rizek (Caplin & Drysdale, Washington, DC)
Larry Schattner (Former Branch Chief, Collection, Bankruptcy and Summonses)
6. Tax-Exempt Organizations
Managers:
Ellen P. Aprill (Loyola Law School, Los Angeles)
Frances R. Hill (University of Miami School of Law)
Review Committee:
LaVerne Woods (Davis Wright Tremaine, Washington, DC)
Christopher M. Jedrey (McDermott Will & Emery, Boston)
James P. Joseph (Arnold & Porter, Washington, DC)
Douglas M. Mancino (McDermott Will & Emery, Los Angeles)
Richard L. Schmalbeck (Duke Law School)
7. Individual Income Tax (Including Earned Income Credit and Marriage Penalty)
Managers:
Ira B. Shepard (University of Houston Law Center)
Daniel Simmons (University of California, Davis)
Review Committee:
Alice Abreu (Temple Law School)
Martin J. McMahon (University of Florida Levin College of Law)
Lawrence A. Zelenak (Duke Law School)
8. Estate, Gift and Generation Skipping Transfer Taxes
Managers:
Carlyn S. McCaffrey (Weil, Gotshal & Manges, New York)
John C. McCaffrey (New York)
Carol Harrington (McDermott, Will & Emery, Chicago)
Review Committee:
Ronald D. Aucutt (McGuireWoods, McLean, VA)
Dennis I. Belcher (McGuire Woods, Richmond, VA)
Stanley M. Johanson (University of Texas Law School)
Mildred Kalik (Simpson Thacher & Bartlett, New York)
Lloyd Leva Plaine (Sutherland Asbill & Brennan, Washington, DC)
Pam H. Schneider (Gadsden Schneider & Woodward, King of Prussia, PA)
9. Pensions and Deferred Compensation
Managers:
Regina T. Jefferson (Catholic Law School)
Norman P. Stein (Alabama Law School)
Review Committtee:
Deene B. Goodlaw (University of California, Berkeley Law School)
Daniel I. Halperin (Harvard Law School)
Nell Hennessey (Fiduciary Counselors, Washington)
Leon E. Irish (International Center for Civil Society, Washington, DC)
J. Mark Iwry (Brookings Institution, former Benefits Tax Counsel, Treasury)
Alicia H. Munnell (Center for Retirement Research, Boston College)
Carolyn E. Smith (Alston & Bird, Washington, DC)
C. Eugene Steuerle (Urban Institute, former Deputy Assistant Secretary for Tax Policy, Treasury)
Thomas D. Terry (former Benefits Tax Counsel, Treasury)
Bruce A. Wolk (University of California-Davis Law School)
10. Consumption Tax Initiatives
Managers:
Review Committee:
David Elkins (SMU Dedman School of Law (Visiting Professor) and Netanya College, Israel)
Mitchell L. Engler (Cardozo Law School)
David A. Weisbach (University of Chicago Law School)
11. Excise Taxes (reserved)
C. Tax Notes
Tax Analysts, the publisher of Tax Notes, nurtured the shelf project. Tax Notes will publish the full text of many fully polished proposals. Neither Tax Notes nor Tax Analysts is responsible for the contents of specific proposals. Projects under development or comments to Tax Notes projects can always be found at the www.taxshelf.org.
D. Award
An anonymous donor has agreed to fund an award to the best shelf project of 2007-2008. Managers and review committees are eligible. The best project will serve the missions of The Shelf Project and also should have an element of niftiness in it. The award gives not just the honor but also $1,000.
