Arenas of Tax Policy in Tax Notes 06-18-2012

7/27/2019 Arenas of Tax Policy in Tax Notes 06-18-2012

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Volume 135, Number 12 June 18, 2012

An Arms Race AgainstOffshore Tax Havens

tax notes

Proposed Regs on Back-to-Back S Corp Loans Get Mixed Reviews

The Downside of Patent Boxes

Arenas of Federal Tax Policy

Does the Taxing Clause Give Congress Unlimited Power?

Factual Distortions Derail Productive Debate on Tax Reform


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ON THE COVER

1435 An Arms Race Against OffshoreTax Havensby Marie Sapirie

1438 Proposed Regs on Back-to-BackS Corp Loans Get Mixed Reviewsby Shamik Trivedi

1442 The Downside of Patent Boxesby Lee A. Sheppard

1499 Arenas of Federal Tax Policyby Sheldon D. Pollack

1515 Does the Taxing Clause GiveCongress Unlimited Power?by Erik M. Jensen

1517 Factual Distortions Derail ProductiveDebate on Tax Reformby S. Douglas Hopkins

Cover graphic: AP Photo/Alexander Zemlianichecko

1433 WEEK IN REVIEW

NEWS

1439 New Substantial Business ActivityTest Criticized as Excessiveby Jeremiah Coder

1444 The Pitfalls of Comparative Tax Analysisby Joseph J. Thorndike

1446 FATCA, Circular 230 on SummerGuidance Agendaby Amy S. Elliott

1448 Disguised Sale Guidance MightDefine Capital Expenditureby Amy S. Elliott

1450 BDO Agrees to $50 MillionSettlement Over Tax Sheltersby William Hoffman

1451 Can IP PINs Prevent RepeatTaxpayer Identity Theft?by William Hoffman

1453 Practical Advice for PractitionersCombating Identity Theftby William Hoffman

1455 Some GOP Senators Flexible onTax Reform, Deficitby Michael M. Gleeson

1457 Divisive VotesShould Not Be HeldBefore Election, Baucus Saysby Michael Beller

1459 Extenders Should Get IndividualScrutiny, Panelists Sayby Michael Beller

1460 Panelists Defend Incentives forOil and Gas Industryby Meg Shreve and Michael Beller

1461 Obama, Romney Outline CompetingEconomic Visionsby Michael M. Gleeson

1462 Senate Appropriators Approve6 Percent IRS Budget Increaseby William Hoffman

1464 IFRS Convergence Threatened byGaps in Application Guidanceby Thomas Jaworski

WEEKLY UPDATE

1467 Guidanceby Joseph DiSciullo

1471 Correspondenceby Joseph DiSciullo

40 YEARS OF TAX NOTES

1475 Tax Exemptions & Contributions forPrivate Single-Sex Schoolsby Donald C. Alexander

1480 The Hedging Rules: Clarity orConfusion?by Paul M. Schmidt

SPECIAL REPORT

1499 Arenas of Federal Tax Policyby Sheldon D. Pollack

tax notes

CONTENTS

Volume 135 Number 12

TAX NOTES, June 18, 2012 1431


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VIEWPOINTS

1515 Does the Taxing Clause GiveCongress Unlimited Power?by Erik M. Jensen

1517 Factual Distortions Derail ProductiveDebate on Tax Reformby S. Douglas Hopkins

1528 Bailey v. CommissionerTwiceFlawed, but for Other Reasonsby Michael J. Grace

ESTATE AND GIFT RAP

1533 Gift Tax Completion andRetained Powersby Bridget J. Crawford

LETTERS TO THE EDITOR

1539 Worldwide Apportionment Would

Stop Export of Jobs and Profits1540 Former IRS Official Argues for

Expanding Letter Ruling Program

1541 TAX CALENDAR

tax notes

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1432 TAX NOTES, June 18, 2012


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Arenas of Federal Tax Policy

By Sheldon D. Pollack

Table of Contents

The Primacy of the Federal Income Tax . . . . . . 1501

Distributive Tax Policy . . . . . . . . . . . . . . . . . . 1502

Regulatory Tax Policy . . . . . . . . . . . . . . . . . . . 1507

Redistributive Tax Policy . . . . . . . . . . . . . . . . 1510

Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 1513

In the study of public policy, political scientistscommonly identify three types of policies: distribu-tive, redistributive, and regulatory. It has been saidthat each type of public policy generates its own

unique arena of power,1 which is characterized

by a distinctive pattern of decision-making andinteraction among participants in the policymakingprocess (legislators, political elites, interest groups).In other words, each type of public policy is asso-ciated with a unique pattern of politics as well asdistinct political institutions wherein that policy ismade. As Ted Lowi famously put it, policy causespolitics.2 This typology is particularly useful inmaking sense of the varied and often conflictingaspects of federal tax policy.

That said, tax policy does not fit neatly into anysingle category of public policy. Different aspects offederal tax policy fall into each of the three catego-

ries. Indeed, there is no single federal tax policy butrather separate policy streams, each generated in itsown distinct political arena by different groups ofpolitical elites; that is, there are multiple arenas ofpower for federal tax policy.3 A good deal of federaltax policy originates in Congress and follows theclassic pattern characteristic of distributive policies;others can be traced to regulatory policy initiativesset in motion by nonpartisan experts and profes-sional staff in the executive branch. Still othersimplement highly partisan redistributive policiesthat originate in the White House or with one of themajor political parties. These redistributive policies

often emerge as salient political issues in nationallycontested elections while regulatory tax policies aretypically negotiated and resolved behind closeddoors.

Simply put, not all tax policies are the same.Some are distributive, some are regulatory, andsome are redistributive. Moreover, each type of tax

1In a seminal review more than 45 years ago, politicalscientist Theodore Lowi outlined a typology for public policy

based on that classification of public policies: American Busi-ness, Public Policy, Case Studies, and Political Theory, 16WorldPolitics 679 (1964). Over the years, the conceptual framework

has been subject to refinement, debate, and criticism. See, e.g.,James Q. Wilson, The Politics of Regulation, inThe Politics ofRegulation364-372 (1980) (suggesting that the important factorin distinguishing types of public policy is the distribution ofcosts and benefits to the relevant political actors and suggestingan alternative typology).

2Lowi,Arenas of Power12 (2009).3In assessing Lowis original typology, Robert Spitzer, in

Promoting Policy Theory: Revising the Arenas of Power, 30Poly Studies J.675 (1987), perceptively observed that particularpolicies often possess the traits of more than just one type ofpolicy. The same can be said for federal tax policy.

Sheldon D. Pollack

Sheldon D. Pollack is aprofessor of law and politicalscience at the University ofDelaware. He is the author ofThe Failure of U.S. Tax Policy:Revenue and Politics (1996);Refinancing America: The Re-publican Antitax Agenda(2003); andWar, Revenue, andState Building: Financing the

Development of the AmericanState (2009).

In this report, Pollack argues that there are threedistinct types of tax policy: distributive, regulatory,and redistributive. Each type is made in a differentpolitical arena, by different political actors and fordifferent purposes. Further, each policy arena ischaracterized by its own distinctive pattern ofpolitics, decision-making, and interaction amongthe participants. Pollack delineates the characteris-tics of the three types of federal tax policy and thenlinks them to their own political arena. The goal isto explain how the separate policy streams con-verge to form what we refer to as federal tax

policy.The author wishes to thank Lawrence Zelenak of

Duke Law School, Paul Quirk of the University ofBritish Columbia, and Leslie Goldstein and JasonMycoff of the University of Delaware, for theirhelpful comments and suggestions on an earlierversion of this report.

tax notes

SPECIAL REPORT



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policy is associated with its own distinctive patternof politics as well as ensembles of political actorsand political institutions.

In this report, I delineate the characteristics of thethree types of federal tax policy and then link themto their own associated politics, political institu-tions, and political actors. Academics, economists,

political scientists, tax professionals, and journalistsall tend to focus on different aspects of federal taxpolicy, and in doing so, overlook the other types oftax policy and their associated arenas of power. Forinstance, in this era of fiscal deficit, tax academicsand economists have focused their attention on taxpreferences and how they erode the income tax baseand cost the national government revenue. Politicalscientists, on the other hand, traditionally study thecongressional arena of policymaking and distribu-tive tax policies. For their part, journalists focus oncorruption in the tax code as well as the contem-porary political debate over tax rates, virtually tothe exclusion of regulatory tax policies the do-main of tax professionals. The goal here is to presenta portrait of the three policy streams and theirrespective political arenas and explain how thosestreams converge to form what we collectively referto as federal tax policy.

Of the various types of public policy, the mostfamiliar to the public and students of Americanpolitics is distributive policy, which is the time-honored politics of Congress and its committees.The associated politics are logrolling and vote trad-ing, the objective of which is to provide special

benefits to favored constituents and interest groups.Representatives support subsidies, spending, ear-marks, and other forms of pork-barrel legislation(the pejorative term for distributive policy) forconstituents of fellow lawmakers as reciprocity forfavorable votes on legislation that secures benefitsfor their own constituents. The politics of logrollingand vote trading favors incumbents in their effortsto secure reelection widely recognized as theprimary objective of congressional policymakers.4

Outside Congress, coalitions of convenience formamong the various interests affected by specificpolicies and legislation, but those groups have littleorganizational connection and no overarching ideo-logical affinities that bind them.

There are few, if any, coherent policies or prin-ciples underlying the public law enacted by Con-

gress through such a political process.5 Theresulting distributive legislation consists of highlyindividualized decisions that only by accumulationcan be called a policy.6 For example, the accumu-lation of the countless votes in Congress on riversand harbors projects throughout the 19th century iswhat amounted to river and harbor publicpolicy.7 There was no principle guiding the law-makers who cast their votes, only their interest indistributing localized benefits to their constituents.Similarly, 19th century tariff policy was little morethan a long succession of bills bestowing preferen-tial rate schedules on favored industries and sec-tors.8

Regulatory policy is specific and narrow in itsapplication, and most significantly, when it is di-rected for a public purpose (rather than capturedfor the benefit of the regulated), it has a negativeimpact on those discretely defined groups or indus-tries targeted by regulators. These policies imposecosts on targeted groups, which accordingly have astrong interest in organizing to oppose them. Af-fected interests organize and exert their oppositionat the sector level, where political coalitions coa-lesce. Coalitions form around specific issues thataffect groups, but each member of the group isaffected differently. Hence, coalitions that form inopposition to regulatory policies tend to be unstableand short-lived.9 The political networks that coa-lesce are loose and informal, and the political bar-gaining among relevant participants (regulatorsand organized opposition groups) is generally con-ducted outside the view of the public.

Redistributive policies affect broad social or eco-nomic classes, rather than narrow economic sectorsand, consequently, generate their own distinctivepattern of politics and decision-making. The politicsof redistributive policies is relatively stable overtime but is highly responsive to major shifts inpartisan affiliation or the composition of the elec-torate for example, a so-called critical election.10

4Arguably, elections are the most significant factor affectingthe behavior of those in Congress. The classic statement of thatperspective is David R. Mayhew,Congress: The Electoral Connec-tion (1974).

5The incoherence or lack of a unifying principle of legislationproduced by interest group politics (or interest-group liberal-ism) is one of the central themes of Lowis most influentialstudy,The End of Liberalism: Ideology, Policy, and the Crisis of Public

Authority(1969).6Lowi, American Business, supranote 1, at 690.7For an account of rivers and harbors policy, see John A.

Ferejohn, Pork Barrel Politics: Rivers and Harbors Legislation,1947-1968 (1974).

8Those were the politics observed by E.E. Schattschneider inthe late 1920s in his classic study of policymaking for the tariff,Politics, Pressures, and the Tariff86 (1935).

9SeeLowi, American Business, supra note 1, at 698.10Political scientists commonly divide American political

history into five periods, with the transition from one partysystem to another marked by voter realignment and a critical

COMMENTARY / SPECIAL REPORT

(Footnote continued on next page.)



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Because cleavages fall along broad social or eco-nomic classes, coalition building requires complex

balancing on a large scale.11

Implementing redistributive policies requires thesupport of a majority political coalition. As such,the politics of redistributive policy is played out atthe highest level, which means electoral competi-

tion between the two major political parties. Ifregulatory policies are contested discreetly behindclosed doors, the political issues raised by redis-tributive policies play out in full public view duringnational elections and on the floor of Congress. Theconflicts that arise over redistributive policies arereflected in the highly partisan debates over divi-sive issues, such as the establishment of major socialprograms (for instance, Social Security, Medicare,Medicaid, and healthcare reform) and the rate struc-ture of the federal income tax.

The Primacy of the Federal Income Tax

When we talk about federal tax policy, we usu-ally are referring to public policies relating to thefederal income tax. That is because the income tax isthe most important component in the U.S. revenuesystem. In the early 20th century, the United Statesmoved from its traditional 19th century revenuesystem based on the taxation of imported goodsand commodities (the tariff and various federalexcise taxes) to a revenue system based on thetaxation of income. Revenue from the federal in-come tax steadily increased from the relativelyinsignificant $28 million raised in 1913 (the firsthalf-year the modern income tax was in effect) to$29 billion in 1945 at the height of World War II, to$561 billion in 1990, and to the historic high of $1.53trillion collected in 2007. In 1914 the income taxprovided just 9.7 percent of the total receipts of thefederal government. Today, the tax is the primarysource of revenue for the national government,generating in excess of 55 percent of total federalreceipts.12

Those figures actually understate the importanceof the income tax in financing the operations of thenational government. The Social Security wage taxis the second most productive source of federalrevenue, accounting for more than 40 percent oftotal federal receipts.13 But the revenue from thewage tax is dedicated to paying current benefici-

aries under the Social Security program. The sameis true of the Medicare wage tax; benefits arededicated to recipients of that program.14 Thatleaves the income tax to finance virtually all thediscretionary spending (military and nonmilitary)authorized in the federal budget. That includesfederal spending on education, healthcare, high-ways, transportation, housing, the environment,relief from natural disasters, law enforcement, bank

bailouts, etc. to say nothing of national defense.The revenue collected under the income tax makespossible all those programs. Little wonder the taxattracts so much political attention. As such, themodern income tax has been continually debated,amended, revised, and reformed since its adoptionin 1913. The scope and volume of income taxlegislation has exploded in recent decades. Whileno less controversial politically, the federal gift andestate tax (a unified tax imposed on the transfer ofwealth) is an insignificant source of revenue com-pared with the income tax, raising just $18.9 billionin 2010 less than 1 percent of total federalreceipts.15 An assortment of excise taxes, customduties, and user fees generate the balance of therevenue of the federal government collectivelyamounting to just 5.61 percent of federal receipts.16

But the federal income tax is the golden goose that

finances the American state. For that reason, theincome tax is central to American politics and thefocus of this study.17

election. V.O. Key Jr., A Theory of Critical Elections, 17 J. ofPol.3 (1955). The concept was expanded into a theory of politicalrealignment and institutional development in Walter DeanBurnham, The American Party Systems: Stages of Political Develop-

ment (1967).11Lowi, American Business, supranote 1, at 715.12Federal receipts from all forms of taxation (income, excise,

estate) reached $1 trillion for the first time in 1990. The indi-vidual income tax alone raised $1 trillion in 2000. In the postwarera, the national government has extracted a fairly constantshare of the national economy (19 percent of GDP) throughfederal taxation. Figures from Census Bureau, Statistical Ab-stract of the United States: 1985, Table 488, at 307; andCongressional Budget Office, The Budget and Economic Out-look: Fiscal Years 2011 to 2021 (Jan. 2011), Table E-3, Doc2011-1753, 2011 TNT 18-16.

13Id.The Social Security tax is imposed at a flat rate of 12.4percent (split between employee and employer) on the appli-cable wage base ($110,100 in 2012). Under an agreement be-tween congressional Republicans and the Obamaadministration regarding the extension of the 2001 Bush taxcuts, the employees share of the Social Security wage tax waslowered 2 percentage points to 4.2 percent for calendar year2011 (the Tax Relief, Unemployment Insurance Reauthorization,and Job Creation Act of 2010, P.L. 111-312 (Dec. 17, 2010)). That

cut was extended into 2012.14An additional tax of 2.9 percent (split between employer

and employee) finances the Medicare Trust Fund. The wagebase for the Medicare tax is not capped.

15The intense politics behind the repeal of the federal gift andestate tax in 2001 is described in Michael J. Graetz and IanShapiro,Death by a Thousand Cuts: The Fight Over Taxing InheritedWealth (2005); see also Sheldon D. Pollack, Refinancing America:The Republican Antitax Agenda 137-158 (2003).

16Figures from CBO, supra note 12.17Political scientists have only recently appreciated the im-

portance of tax policy in American politics. Among the best





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Within the national government itself, the Con-stitution formally assigns the power of taxation toCongress.18 All forms of federal taxation (as well asamendments and additions to existing tax laws)must be authorized through legislation duly en-acted by the national legislature. As WoodrowWilson famously observed more than 125 years ago,Congress legislates through its committees.19 Thatplaces the congressional taxwriting committees atthe center of the federal tax policymaking process.

The Constitution further requires that revenuebills originate in the House. Hence, the House Waysand Means Committee has the first opportunity toarticulate and define federal tax policy, while theSenate Finance Committee plays a secondary, albeitcritical, role in shaping tax policy initiatives.20 Thecongressional taxwriting committees are the politi-cal arena for distributive tax policy.

Distributive Tax PolicyThe income tax is a highly effective tool for

raising revenue for the federal government. It alsohappens to be ideally suited for use by individuallawmakers in distributing economic benefits totheir constituents. That nonpartisan, instrumentaluse of the income tax takes the form of enactingspecial rules, regulations, and statutory amend-ments to the tax code that shelter favored groupsand taxpayers from the burden of the impost. It isnow practically expected that lawmakers will pur-sue special tax provisions that benefit organizedinterest groups, industries, economic sectors, andwealthy individuals located in their home districtsand states. They do not always succeed, but they

constantly try.Distributive revenue policy in Congress is noth-

ing new, but the specific form and content haschanged over time. As the income tax replaced thetariff as the principal source of revenue of thenational government in the early 20th century, thefocus of distributive revenue policy shifted fromproviding constituents with special tariff rates to

special preferences under the federal income tax.The seminal account of distributive tax policy-making was written by Stanley Surrey more than 50years ago and little has changed since.21 Powerfulinstitutional forces compel congressional policy-makers to enact special tax preferences for theirconstituents. Hence, to understand the nature ofdistributive tax policy, one needs to consider thepeculiar characteristics of the political institution inwhich federal tax policy is made: U.S. Congress.

Congress is a political institution that imposes itsown unique framework of incentives (and disincen-tives) that alter the behavior of those who serve init.22 First and foremost, the elections mandated bythe Constitution establish a critical linkage betweenrepresentatives and their constituents the so-called electoral connection.23 With the entire Houseup for reelection every two years, representativesface nearly constant pressure to satisfy the elector-ate. That is especially true for incumbents in mar-ginal, or swing, districts who feel particularly

vulnerable come election time. While U.S. senatorswere originally selected by the legislatures of thevarious states rather than through popular elections(a procedure that created its own set of behavioralincentives and constraints), they too were formallysubjected to the electoral connection with the rati-fication of the 17th Amendment in 1913.24 Becauseof that fundamental change in the rules of the game,senators also must appeal to (some would saypander to) their constituents for the right to holdoffice.25

All politicians have personal agendas they wishto advance in office; however, reelection is the

studies of the politics of the federal income tax are John F. Witte,The Politics and Development of the Federal Income Tax (1985);Ronald F. King, Money, Time, and Politics: Investment Tax Sub-

sidiaries and American Democracy (1993); Cathie Jo Martin, Shift-ing the Burden: The Struggle Over Growth and Corporate Taxation(1991); Timothy J. Conlan, Margaret T. Wrightson, and David R.Beam, Taxing Choices: The Politics of Tax Reform (1990).

18Article I, section 7.19As Wilson put it in Congressional Government: A Study in

American Politicsxvi (1885), Congressional government is Com-mittee government.

20Under Article I, section 7, amendments to revenue legisla-tion originating in the House may be added in the Senate. Majortax policies are commonly added in the Senate as amendmentsto relatively minor revenue bills originating in the House.

21Stanley S. Surrey, The Congress and the Tax Lobbyist How Special Tax Provisions Get Enacted, 70 Harvard L. Rev.1145 (1957).

22In his landmark study of the Senate,U.S. Senators and TheirWorld (1960), Donald R. Matthews explained how the valuesand mores of the institution influence the behavior of itsmembers.

23The importance of elections in affecting the behavior ofelected officials is Mayhews central theme in Congress: TheElectoral Connection, supra note 4. In a famous reformulation ofthe concept of democracy, the Austrian economist JosephSchumpeter argued in Capitalism, Socialism & Democracy (1947)that elections are the chief mechanism for imposing some

measure of accountability on politicians and that the abilityof the electorate to throw out the rascals is the fundamentalprerequisite for a democratic polity.

24By the time the direct election of senators was mandated bythe 17th Amendment, a majority of states had already adoptedor experimented with popular election of senators. For a dis-cussion of the transformation of the election process, see Wil-liam H. Riker, The Senate and American Federalism, 49 Am.Pol. Sci. Rev. 452-469 (June 1955).

25Whether politicians pander to their constituents is thesubject of Paul J. Quirk, Politicians Do Pander: Mass Opinion,Polarization, and Law Making, 7The ForumArt. 10 (2009);but





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prerequisite to satisfying all other political objec-tives. Little is accomplished during a single term ofoffice, and hence all members of Congress have astrong interest in reelection if they wish to have anylasting impact on public policy to say nothing ofretaining a fairly prominent and lucrative job. Thus,the electoral connection has a profound impact onthe behavior of elected officials as it links them totheir constituents, whose support and financialcontributions are critical for reelection.

Congress is a representative legislative body, butnot all national legislatures are organized the same.Congress has its own idiosyncratic institutionalfeatures in particular, the use of single-memberdistricts to elect the members of the House.26 Elect-ing representatives from defined geographic terri-tories magnifies the connection between lawmakersand the dominant interests in the local districts theyrepresent.27 While it is not constitutionally man-dated, Congress enacted a series of statutes begin-ning in 1842 requiring the states to elect theirrepresentatives from single-member districts. From1932 to 1967, that mandate lapsed, and severalstates experimented with electing at-large repre-sentatives to the House in winner-take-all elections.In 1967 Congress reenacted a statutory requirementfor single-member districts. As such, that procedurehas been followed over the last 170 years in all buta handful of cases.28

The overall effect has been to strengthen the linkbetween local interests and their representatives inthe House. Senators represent larger and morediverse territories, and arguably are less beholdento local parochial interests and more inclined to

focus on national policy issues. Even so, senatorsare just as zealous as representatives in promotingthe dominant interests and individual sectors in

their home states. They too understand that dis-tributive policy is a highly effective means of satis-fying the needs of their constituents (constituencyservice), and in doing so, improving their ownpolitical fortunes. Thus, powerful incentives estab-lished by the rules and procedures (both formal andinformal) that organize Congress as a political in-

stitution encourage senators and representatives touse the powers of their office to distribute particu-larized benefits to local interests in their home statesand districts.29 The affinity for distributive policy isnearly universal among those who serve in Con-gress, even those who would prefer to focus onnational or international issues with broader conse-quences. Even conservatives opposed to big gov-ernment readily succumb. As David Stockman,director of the Office of Management and Budgetduring the Reagan administration, once confessed:There is no such thing as a fiscal conservativewhen it comes to his district or his subcommittee.30

Amember of Congress ignoresdistributive policy-making and other forms of constituency service athis own peril. Distributive revenue policy itselftakes a variety of forms enacting special incometax preferences for the benefit of constituents is butone example. But the lawmakers ability to cus-tomize the tax code makes it an efficient andattractive tool for distributing particularized eco-nomic benefits to constituents. That is constituencyservice with a direct economic payoff. Generally, itis easier to provide those benefits to constituentsthrough the tax code than through direct appropria-tions included in the annual federal budget. Anappropriations bill must first clear the relevantsubcommittee with jurisdiction and pertinent tech-nical expertise over the subject matter of the bill

before it reaches the Appropriations Committee,whereas a provision enacted through the tax code isunder the singular jurisdiction of the tax commit-tees.31 (Earmarks are another ideal method for

seeLawrence R. Jacobs and Robert Y. Shapiro, Politicians DontPander: Political Manipulation and the Loss of Democratic Respon-siveness (2000).

26Of the other democracies that employ single-member dis-tricts, most use them in conjunction with proportional represen-tation. Canada and the United Kingdom select nationalrepresentatives from local districts but in the context of acentralized parliamentary system. The localizing effect of thesingle-member districts is partially negated there.

27For an account of how single-member districts reinforcethe importance of local interests and constituency service in theHouse, see Frances E. Lee, Interests, Constituencies, and PolicyMaking in The Legislative Branch 281-313 (2005); Thomas D.Lancaster and W. David Patterson, Comparative Pork BarrelPolitics, 22 Comp. Pol. Stud. 458-477 (1990) (finding strongerincentives for pork-barrel legislation in single-member districtsthan multimember districts).

282 U.S.C.A. chapter 1, section 2c (Title 2: The Congress);P.L. 90-196. The constitutionality of that statutory requirement isquestioned in Paul E. McGreal, Unconstitutional Politics, 76Notre Dame L. Rev. 519 (2001).

29The relationship between the distribution of pork barrelbenefits and congressional elections was suggested in Mayhew,Congress: The Electoral Connection,supranote 4; see alsoFerejohn,Pork Barrel Politics,supranote 7; Morris Fiorina, Some Problemsin Studying the Effects of Resource Allocation in Congressional

Elections, 25Am. J. of Pol. Sci. 543 (1981); Robert M. Stein andKenneth N. Bickers, Congressional Elections and the PorkBarrel, 56 J. of Pol. 377 (1994) (finding connection betweenvulnerable incumbents and increased flow of particularized

benefits to constituents).30Quoted in D. Roderick Kiewiet and Mathew D. McCub-

bins, Congressional Appropriations and the Electoral Connec-tion, 47J. Pol. 59, 65 (1985).

31For a summary of differences between the tax and appro-priations processes, see Thomas J. Reese,The Politics of Taxation198-201 (1980); Christopher Howard, The Hidden Welfare State:Tax Expenditures and Social Policy in the United States 10 (1997).




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providing particularized economic benefits to con-stituents by bypassing the regular budgetary proc-ess; however, in this political climate, the use ofearmarks has become politically suspect and re-stricted by the party leadership.32) Moreover, onceenacted, tax preferences generally (but not always)

become permanent features of the tax code. Exceptin special circumstances, tax preferences are notsubject to annual review and scrutiny, as are budg-etary appropriations.33 Further, while economicallyequivalent, a tax provision thatreducestaxes is ofteneasier to sell politically to both the electorate and tolegislative colleagues than a direct appropriationthatincreases the budget deficit especially whenfacing a soaring national debt.34 That is because theconnection between the cost of a policy and itseconomic benefit is less transparent in the tax policyarena. A tax preference is easily buried in the taxcode, and its price tag never appears as a separateline item in the formal federal budget. All of thismakes tax preferences a particularly attractive form

of distributive policy for members of Congress.There are institutional incentives that encourage

representatives to use distributive tax policy forpolitical advantage, but there are few disincentives.The cost of a tax preference (as well as other formsof pork-barrel legislation) is widely dispersedamong many taxpayers, while the tax subsidy isenjoyed by a few targeted beneficiaries. Conse-quently, opposition to a special tax provision tendsto be weak, diffuse, and difficult to organize, whilethe few beneficiaries of the provision are highlymotivated to lobby those members of Congress whocontrol the power of the purse especially those

on the taxwriting committees.35

The result is a

classic politics of logrolling and vote trading thatgenerates a seemingly endless supply of tax prefer-ences for nearly every organized interest group inAmerica. Democrats and Republicans alike pursuetargeted tax preferences for their respective con-stituents. Sometimes they have the same constitu-ents. Distributive tax policy is nonpartisan as muchas it is unprincipled.

The rise of distributive tax policy correlates withthe decline of political parties and the gradualweakening of the congressional party leadershipsince the early 20th century.36 The trend towarddecentralized power in the House intensified afterWorld War II. As a result, individual lawmakerswere left relatively free to pursue special interestson behalf of their constituents.37 Because enactingspecial tax preferences is such an effective tool forsatisfying the political interests of elected repre-sentatives and their constituents, it became com-mon practice in the modern Congress. While thepost-Watergate reforms of the mid-1970s reversedthose trends, there has been no return to the kind ofcentralized leadership last seen in Congress beforethe major changes adopted in 1910.38

Concurrently, one of the most significant institu-tional developments in the legislative process fortax policy in the last 50 years has been the weaken-ing of control over the tax policy agenda formerlyexercised by the Ways and Means Committee.39

That committee once played a vital institutional rolein checking individual lawmakers in introducing

bills that grant special tax treatment to constituents what political scientist David Mayhew refers toas institutional maintenance.40 For decades, law-makers who introduced these bills relied on Wilbur

32The controversy over earmarks is described in David M.Herszenhorn, Earmark Ban Exposes Rift in Both Parties, TheNew York Times, Nov. 17, 2010, at A1. The Tea Party movementhas campaigned against the use of earmarks, and with theirsuccess in the 2010 midterm elections, the use of earmarks has

been curtailed for now.33Occasionally, tax policies are enacted on a year-by-year

basis. In recent years, Congress has enacted an annual packageof tax extenders to renew some tax credits, deductions, andexemptions. While the package varies from year to year, itinvariably includes an extender for the research and experimen-tation credit and a provision to index the alternative minimum

tax to shelter middle-income taxpayers from its effects. The costof enacting a permanent patch is enormous; hence, Congressprovides only one-year AMT extensions.

34Conservatives typically favor tax preferences because theyview economic incentives built into the tax code as a lesscoercive form of government intervention than direct subsidiesor command and control-type regulations.

35While contributions do not necessarily sway representa-tives, the money does flow more freely to members of the moreimportant committees, including Ways and Means. For ananalysis of the relationship between campaign contributionsand voting on the Ways and Means Committee, see John R.

Wright, Contributions, Lobbying, and Committee Voting in theU.S. House of Representative, 84 Am. Pol. Sci. Rev. 417 (1990).

36The possibility of a relationship between the rise of politi-cal institutions that implement macroeconomic fiscal policy inAmerica and the decline of political parties is considered in John

J. Coleman,Party Decline in America: Policy, Politics, and the FiscalState(1996).

37For an overview of changes to the organization of Congressand the committee system, see Eric Schickler, InstitutionalDevelopment of Congress, in The Legislative Branch 35-62(2005). The classic account of the committee system in Congress

remains Richard Fenno, Lawmakers in Committees (1973).38SeeBarbara Sinclair,Legislators, Leaders, and Lawmaking: The

U.S. House of Representatives in the Postreform Era (1998); Sinclair,Parties and Leadership in the House, inThe Legislative Branch,supra note 37, at 224-254.

39The role of the Ways and Means Committee in the taxpolicymaking process is examined in Randall W. Strahan, NewWays and Means: Reform and Change in a Congressional Committee(1990); see alsoJohn F. Manley, The Politics of Finance: The HouseCommittee on Ways and Means (1970).

40Mayhew,Congress: The Electoral Connection,supranote 4, at142.


(Footnote continued in next column.)



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Mills (the powerful Ways and Means chair from1957 to 1975) to defend the integrity of the taxlegislative process and reject their own proposals.41

Since Millss fall in 1974, no one has had muchinterest in playing that role.42 In the breach, indi-vidual representatives and senators were left com-paratively free to use distributive tax policies toadvance their own personal political objectives in particular, constituency service. The result has

been an increase in distributive tax policy includedin the massive omnibus revenue legislation thatCongress enacts every few years, loaded withscores of special tax provisions for constituents of

both parties.43 Omnibus tax legislation occasionallyimplements genuine public policy, but the packageis mostly an accumulation of unrelated tax provi-sions that distribute special preferences to favoredinterests. Sadly, that is what commonly passes fortax policy in Washington.

Tax preferences are enacted through legislativetechniques that are difficult for nonspecialists tocomprehend. Sometimes, the class of taxpayers who

benefit from a tax preference is so narrow that itconsists of a single individual taxpayer or corpora-tion as in the case of transition rules that protectunnamed taxpayers from the adverse effects of newtax legislation by grandfathering them under priorlaw.44 Even members of the congressional taxwrit-

ing committees do not always know the intendedbeneficiary of the transition rules they adopt although someone on their staff certainly does, andis keeping score. Tax preferences targeted to a

broader class of taxpayers for a longer period oftime are generally enacted through statutoryamendments or new provisions to the tax code

itself. Those preferences take the form of deduc-tions, credits, deferrals, and exemptions designed tobenefit specific groups or economic interests. Theyare now collectively referred to as tax expendituresto emphasize the extent to which they are function-ally equivalent (at least as far as the net economicimpact on Treasury) to direct expenditures or out-lays authorized in the budget. The concept of taxexpenditures has been with us for decades formally introduced to budget analysis by Treasuryin 1968 during Surreys tenure as assistant secretaryfor tax policy. Recognized by statute in 1974, taxexpenditures are defined as those revenue losses

attributable to provisions of the Federal tax lawswhich allow a special exclusion, exemption, ordeduction from gross income or which provide aspecial credit, a preferential rate of tax, or a deferralof tax liability.45 Every tax expenditure represents adeparture from a pure economic income tax.46

Tax expenditures are not loopholes, which taxprofessionals generally think of as unintended tax

benefits derived from a glitch in the tax laws or theintersection of different unrelated provisions of the41Millss important role in federal tax policymaking is the

subject of Julian E. Zelizer, Taxing America: Wilbur D. Mills,Congress, and the State, 1945-1975 (1998).

42In October 1974 Mills was stopped by police following aminor traffic violation. He was intoxicated. The incident isdescribed in Stephen Green and Margot Hornblower, MillsAdmits Being Present During Tidal Basin Scuffle,The Washing-ton Post, Oct. 11, 1974, at A1. Mills was reelected to his seat fromArkansas in November 1974, but following a second display ofpublic drunkenness, he resigned as chair and did not seekreelection.

InTaxation and Democracy (1993), Sven Steinmo describes thefall of Mills and the subsequent reforms of Ways and Means:The effect of these rule changes . . . was to break open the taxpolicy-making system and undermine the already weak forcesof restraint. . . . This made an already overly open process evenmore open and made an already porous system even moreloop-hole ridden.

43More than 30 years ago, Surrey characterized contempo-rary tax legislation as a catch-as-catch-can affair that produces

complexities, unfairness, conflicting moves in all directions,almost mindless provisions.SeeOur Troubled Tax Policy,TaxNotes, Feb. 2, 1981, p. 179.

44For a discussion of how narrow tax preferences are grantedunder transition rules, see Lawrence Zelenak, Are Rifle ShotTransition Rules and Other Ad Hoc Tax Legislation Constitu-tional? 44 Tax L. Rev. 563 (1989). Special transition rules wereenacted for the Tax Reform Act of 1986 that saved individualand corporate taxpayers (identified only indirectly throughtechnical language) millions of dollars in taxes by grandfather-ing them under prior law. The story is told in Donald L. Barlettand James B. Steele, The Great Tax Giveaway: How the

Influential Win Billions in Special Tax Breaks, The PhiladelphiaInquirer, Apr. 10, 1988, at A1; see alsoGraetz and Shapiro, Deathby a Thousand Cuts, supra note 15, at 18-19. The practice ofproviding special tax treatment in transition rules received somuch negative publicity that it has been used only sparinglysince 1986.

45Congressional Budget and Impoundment Act, P.L. 93-344,section 3(a)(3).

46The classic accounts of the political process that producestax expenditures are Surrey,Pathways to Tax Reform: The Conceptof Tax Expenditures (1973); and Surrey and Paul McDaniel, TaxExpenditures (1985). The concept of tax expenditures has beensubject to criticism over the years. See, e.g., Boris I. Bittker,

Accounting for Federal Tax Subsidies in the NationalBudget, 22Natl Tax J.244 (1969); Douglas A. Kahn and JeffreyS. Lehman, Tax Expenditure Budgets: A Critical View, TaxNotes, Mar. 30, 1992, p. 1661; Leonard E. Burman, Is the TaxExpenditure Concept Still Relevant? 56 Natl Tax J. 613 (2003);Clifton Fleming Jr. and Robert J. Peroni, Can Tax ExpenditureAnalysis Be Divorced From a Normative Tax Base? A Critique ofthe New Paradigm and Its Denouement, 30 Va. Tax Rev. 135(2010). For a spirited defense of the use of tax expenditures, seeEdward A. Zelinsky, James Madison and Public Choice atGucci Gulch: A Procedural Defense of Tax Expenditures and TaxInstitutions, 102Yale Law J. 1165-1207 (Mar. 1993).





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tax code that produce an unanticipated tax advan-tage (for example, a tax shelter).47 Rather, tax ex-penditures are provisions enacted by Congress forthe express purposes of allowing those taxpayers(individuals or corporations) who comply with thedictates of the statute to reduce their tax liability.Among the many tax expenditures found in the tax

code are those that reward taxpayers who contrib-ute to a charity, drill for oil or gas, invest in researchand development or a corporate jet, purchaseenergy-efficient windows or an automobile with ahybrid engine, produce ethanol, pay for a de-pendents college tuition, or buy municipal bonds.The list goes on and on. Hedge fund managers paya preferential rate of 15 percent not because of someglitch or loophole in the tax code but becauseCongress expressly prescribed that rate to encour-age capital investment. Business benefits frommany similar tax preferences; labor has a host of itsown. But middle-income taxpayers are also benefi-

ciaries of tax preferences. Year after year, the mostexpensive tax expenditures are those that subsidizethe cost of employer-sponsored healthcare insur-ance, home mortgage interest, and contributions toretirement accounts.48 Those tax expenditures areclaimed by so many middle-income taxpayers(many of whom are voters) that political efforts toremove them from the tax code are invariablydoomed to failure. Reform proposals to eliminatetax preferences and broaden the tax base run con-trary to the incentives and interests established bythe political institutions within which policymakersact, and hence, are unlikely to succeed.49

One major consequence of the growth of taxexpenditures is that the revenue-raising capacity ofthe income tax has been undermined. That erosionof the tax base continues despite the great success ofreformers in stripping the tax code of special-interest provisions under the Tax Reform Act of1986.50 While an extraordinary number of tax ex-penditures were repealed under that historic legis-lation, the political process for making tax policywas left unchanged. Not surprisingly, the samepolitical institutions continued to produce the samekind of distributive tax policies in the decades thatfollowed, and soon enough, the tax code was againloaded with special-interest provisions.51

And it remains so. Tax expenditures cost the U.S.treasury an estimated $1.2 trillion in fiscal 2011 up from $878 billion in 2008.52 Because of increasesin tax expenditures (and the budget deficits attrib-utable to them), Congress is under constant pres-sure to increase tax rates. Thus, the distinctivefeature of the income tax in the postwar era has

been high marginal tax rates with an abundance oftax preferences doled out to constituents by electedrepresentatives eager to alleviate the burden of thetaxes they themselves enacted.53 Distributive tax

47Tax loopholes are used to shelter liabilities arising underthe income tax. Unfortunately, it is not so easy to distinguish atax shelter from a tax expenditure. See Calvin H. Johnson,Whats a Tax Shelter?Tax Notes, Aug. 14, 1995, p. 879, 95 TNT160-21. Graetz once defined a tax shelter as a deal done by verysmart people that, absent tax considerations, would be verystupid. Quoted in A Special Summary and Forecast of Federaland State Tax Developments, The Wall Street Journal, Feb. 10,1999, at A1. The most abusive corporate tax shelters fall into thiscategory because they lack economic substance.

48OMB, Budget of the U.S. Government, FY 2011, Analyti-cal Perspectives, Table 16.3. The budget lists more than 150 taxexpenditures. With the exception of a few refundable tax credits

targeted to the working poor, tax expenditures largely benefitmiddle- and upper-income taxpayers. Burman et al., How BigAre Total Individual Tax Expenditures, and Who Benefits FromThem? Tax Policy Center Discussion Paper No. 31 (Dec. 2008),Doc 2008-25536, 2008 TNT 235-21.

49A report by the Debt Reduction Task Force of the BipartisanPolicy Center proposed the elimination of most tax deductionsand preferences (as well as a host of other unrealistic reformproposals). See Restoring Americas Future: Reviving theEconomy, Cutting Spending and Debt, and Creating a Simple,Pro-Growth Tax System (2010), Doc 2010-24611, 2010 TNT222-29.

Likewise, Alan Simpson and Erskine Bowles, the co-chairs ofPresident Obamas National Commission on Fiscal Responsibil-ity and Reform, recommended the elimination of all tax ex-penditures in their report The Moment of Truth (Dec. 2010),Doc 2010-25486, 2010 TNT 231-35. It is easy to make thoserecommendations but harder to convince lawmakers to actcontrary to their own political interests.

50P.L. 99-514. Not surprisingly, the sacred tax preferences(e.g., the home mortgage interest deduction and exclusions foremployer-provided healthcare and retirement contributions)were left untouched by TRA 1986.

51According to Treasury estimates, tax expenditures in-creased from 5.2 percent of GDP in 1976 to 8.3 percent in 1985.With TRA 1986, the level of tax expenditures dropped to levelsof the mid-1970s and thereafter rose to a constant 7 percent ofGDP. The JCT lists 159 new tax expenditures enacted since 1986.SeeJCT, Background Information on Tax Expenditure Analysisand Historical Survey of Tax Expenditure Estimates, JCX-15-11(Feb. 28, 2011), at 26, Doc 2011-4215, 2011 TNT 40-19.

52JCT, Estimates of Federal Tax Expenditures for FiscalYears 2009-2013, JCS-1-10 (Jan. 11, 2010), Doc 2010-631, 2010TNT 7-22; Donald B. Marron, How Large Are Tax Expendi-tures? Tax Notes, Mar. 28, 2011, p. 1597, Doc 2011-6124, 2011TNT 62-50. Income tax expenditures amount to roughly 8

percent of GDP. In its computations, the JCT does not take intoaccount behavioral effects or the interaction among the varioustax expenditures. Thus, totaling those expenditures listed in thetax expenditure budget does not provide a perfect measure ofthe total cost to the treasury (although taking into account all theinteractions and behavioral responses, that figure is close).Burman et al., supranote 48 (concluding that revenue loss fromall nonbusiness individual income tax expenditures is 5 to 8percent higher than the simple mathematical total).

53The United States has long ranked just behind Japan for thedubious distinction of having the highest combined federal/state corporate tax rate (39.3 percent versus 39.5 percent). See


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policy is a product of the unique political incentivesthat shape the behavior of congressional policy-makers, and it is responsible for a significant por-tion of what we generously refer to as federal taxpolicy.

Regulatory Tax Policy

The political arena of distributive (pork-barrel)tax policy will seem familiar to many from thecountless stories in the popular press and newsmedia on the lobbying, special interests, and cor-ruption that purportedly is endemic to Americanpolitics. In recent years, journalists have devotedconsiderable attention to federal tax policy, explor-ing similar themes as they relate to the tax code.54 Intheir investigations, they depict legislators as shillsfor corporate interests and the supposedly ubiqui-tous special interests. The income tax is portrayedas a scheme by which the wealthy enrich them-selves at the expense of middle-income Ameri-

cans.55

Law professors commonly portray the taxlaw as little more than a tool for rent extraction. 56

If that view is descriptive of the distributive arenaof federal tax policy (and that is debatable), itignores significant aspects of other arenas of taxpolicy specifically, those times when public offi-cials impose their policy preferences on privateeconomic interests. That is the essence of regulatorytax policy, which is made by different political elites

and within different political institutions than thosethat generate distributive tax policy.

If the political arena for regulatory tax policy isfamiliar territory to tax professionals and scholarsof public policy, it is largely unknown to the public as well as most political scientists. There is goodreason for that: Regulatory tax policies are imple-mented through highly technical rules and regula-tions that are exceedingly difficult for nontaxprofessionals to decipher because of the specializedand arcane language. Further, the most onerous andcomplex of those rules and regulations affect only arelatively small number of taxpayers typically

business corporations and those with high incomesand access to competent professional counsel. Forthat reason, regulatory tax policy is largely ignored

by journalists and the popular press.

The professional bureaucracy in Treasury and theIRS that drafts tax regulations was created byCongress to administer and enforce the tax legisla-tion it enacts. Congress also relies on the nonparti-san tax bureaucracy (including the staff of its owntaxwriting committees) to help draft the technicalrules and regulations that implement the tax laws.Further, Congress created the nonpartisan JointCommittee on Taxation and Congressional Budget

Office to advise members on fiscal and budgetarymatters.57 The professional staff responsible formaking regulatory tax policy is relatively insulatedfrom the pressures of interest groups and lobbyistsas well as the vagaries of partisan politics. Profes-sional ethics and academic principles of taxationand economics, rather than political expediency,guide regulatory policymakers.

Tax Foundation, Illinois Corporate Tax Hike Inches U.S. Closerto #1 Ranking Globally, Fiscal Fact No. 257 (Jan. 14, 2011), Table1. With recent reform in Japan, the United States now has thehighest corporate tax rate in the world. See Meg Shreve,Republicans Bemoan U.S. Corporate Tax Rate Ranking, TaxNotes, Apr. 9, 2012, p. 146, Doc 2012-6824, or 2012 TNT 63-6.

54For a critique of muckraker journalists who sensational-ize tax policy, see Sheldon D. Pollack, Revenge of the Muck-rakers,Tax Notes, Apr. 14, 1997, p. 255,Doc 97-10244, or 97 TNT71-88. A contemporary practitioner of muckraker tax journalismis David Kocieniewski, a business reporter for The New York

Times. Filling the void left by the departure of David CayJohnston, Kocieniewski has devoted himself to (in the words ofhis editor) exposing the obscure provisions that businesses andthe wealthiest Americans exploit to drive their tax bills down torock bottom. Kocieniewski won a Pulitzer Prize in 2012 forexplanatory reporting.

55Other examples of sensationalist journalism on tax policyinclude: Martin L. Gross, The Tax Racket: Government ExtortionFrom A to Z (1995); Donald L. Barlett and James B. Steele,

America: Who Really Pays the Taxes? (1994); Johnston, PerfectlyLegal: The Covert Campaign to Rig Our Tax System to Benefit theSuper Rich and Cheat Everyone Else (2003) andFree Lunch: Howthe Wealthiest Americans Enrich Themselves at Government Expenseand Stick You With The Bill (2008).

56Examples of the so-called economic theory of regulation asapplied to tax policy include Richard L. Doernberg and Fred S.

McChesney, On the Accelerating Rate and Decreasing Durabil-ity of Tax Reform, 71 Minn. L. Rev.913 (1987), 913; Doernbergand McChesney, Doing Good or Doing Well? Congress and theTax Reform Act of 1986, 62 N.Y.U. L. Rev. 891 (1987), 891;McChesney, Rent Extraction and Rent Creation in the Eco-nomic Theory of Regulation, 16 J. of Legal Stud. 101 (1987).Daniel Shaviro neatly summarizes the central themes of thatschool in Beyond Public Choice and Public Interest: A Study ofthe Legislative Process as Illustrated by Tax Legislation in the1980s, 139 U. Pa. L. Rev. 6-7 (1990):

Legislation (along with other government action) is aproduct supplied to well-organized interest groups that

are struggling to maximize the incomes of their members,often at the expense of the less well-organized. In effect,legislation is sold to the highest bidder, with bids being

paid in the currency of votes, campaign contributions,and personal benefits such as honoraria.57The JCT was created in 1926. The chair rotates between the

chairs of the Ways and Means and Finance committees. The JCTstaff includes lawyers and economists who advise the commit-tees and individual lawmakers on tax legislative proposals andprovide the official revenue estimates on all proposed taxlegislation. The CBO was created by Congress in 1974 for thepurpose of providing it with an independent source of expertiseto counterbalance the recommendations of the OMB, an agencyin the executive office whose reputation for nonpartisanshipwas tainted during the Johnson and Nixon administrations.





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This arena of power is within the executivebranch and the professional agencies, outside thepolitical arena of the congressional committee sys-tem where private interest groups more typicallyexert influence over decision-making. True, thehighest officials in the tax bureaucracy are politicalappointees, including the Treasury secretary, as-sistant Treasury secretary for tax policy, IRS com-missioner, IRS chief counsel, and the JCT chief ofstaff.58 But the tax professionals who formulate andadminister the regulatory tax policies are civil ser-vants (formally nonpartisan) rather than politicalappointees. Most important, none of them (includ-ing the political appointees) are required to competein elections to retain their office. As such, they areless susceptible to the pressures of the electorate ororganized interest groups.

How particular regulatory tax policies make itonto the policy agenda is itself a complicated mat-ter.59 Some policies are proposed by the congres-

sional leadership or the White House under theguise of corporate welfare or shutting down abu-sive transactions. Those initiatives may be politi-cally motivated because such themes resonate withthe liberal constituency of the Democratic Party.The tax bar and accounting associations also peri-odically weigh in with concerns about abusivetransactions or practices.60 Their recommendationsfor regulatory policies are given great deference bythe tax authorities because those groups are madeup of tax professionals intimately familiar withprivate practices. Occasionally, the media will playa similar role in publicizing abuses and instigatingreforms although by the time the media reportson an abusive practice, invariably it is alreadyfamiliar to the tax authorities and private bar.61

Most important, many regulatory tax policies canbe traced to initiatives set in motion by the profes-sional staff itself.

The professional staff routinely proposes to thetaxwriting committees regulatory policies for end-ing abusive transactions, loopholes, or technicalglitches in the tax code. Many reform measures

enacted by Congress can be traced to internalposition papers drafted by Treasury or the JCT. Thatwas the case with many of the reforms enactedunder TRA 1986.62 For example, the enactment ofthe passive activity loss rules (which limit thededuction for artificial tax losses generated by taxshelter investments) was a regulatory response towidespread abusive practices among wealthy tax-payers.63 Similarly, the original issue discount rules(which require the economic accrual of interest ondebt instruments sold at a discount) were devised

by economists in Treasurys Office of Tax Policy inthe early 1980s and later enacted through omnibus

tax legislation.64

In both cases, the regulatory taxpolicies were first suggested by the professionalstaff and later included in legislation that laid out ageneral regulatory scheme. Thereafter, the policieswere given substance through regulation projectsdrafted by the professional staff.65

58The professional staff of the taxwriting committees func-tion differently because they are appointed by the leadership toadvise them on revenue issues. For an account of the role ofnonpartisan staff in the tax legislative process, see Michael J.Malbin, Unelected Representatives: Congressional Staff and theFuture of Representative Government 170-187 (1980); HedrickSmith, The Power Game: How Washington Works270-325 (1988).

59For a general discussion of how particular issues arise onthe political agenda, see John W. Kingdon,Agendas, Alternatives,and Public Policies (1984).

60The American Bar Association Section of Taxation (as wellas several regional associations most prominently, those ofPhiladelphia and New York) is the main professional associationthat represents tax attorneys, while the American Institute ofCertified Public Accountants is the professional association ofCPAs. Since 1954, both organizations have been active inlobbying the government for new rules and regulations to closeloopholes and abuses.

61A good example of how abusive practices known to taxprofessionals slowly are recognized by journalists and regula-tors involves the rise of fraudulent corporate tax shelters. Thosewere marketed almost as soon as the ink was dry on TRA 1986,

which allegedly ended those practices. It was not until themid-1990s that the practice was noticed by even professional

journalists. Only later did the IRS take decisive steps to end themost blatant abuses.

62President Reagan initiated the campaign for tax reform inhis 1984 State of the Union address, when he called on Treasuryto study the feasibility of tax reform and simplification. The firstdraft for a tax reform bill (known as Treasury I) was based onTreasurys report.See Tax Reform for Fairness, Simplicity, andEconomic Growth: The Treasury Department Report to thePresident (1984).

63The idea for the passive activity loss rules came from DavidBrockway, JCT chief of staff, who sold the concept to Sen. BobPackwood, chair of the Finance Committee. Jeffrey H. Birnbaumand Alan S. Murray, Showdown at Gucci Gulch: Lawmakers,Lobbyists, and the Unlikely Triumph of Tax Reform 218-220 (1988).The concept was then given content by the professional staffand enacted by Congress under TRA 1986 in unusually detailedlegislation as new section 469.

64The role of the Office of Tax policy is described in RonaldA. Pearlman, The Tax Legislative Process: 1972-1992, TaxNotes, Nov. 12, 1992, p. 939; and Kenneth W. Gideon, Tax Policy

at the Treasury Department, Tax Notes, Nov. 12, 1992, p. 889.The original issue discount rules were introduced in the 1980s toprevent the deferral of tax on interest payments made on debtinstruments issued at a discount. The principles were adoptedin section 1271 et seq. and in regulations. The regulations are 441pages long and use complicated economic concepts. Both sets ofrules are now part of the regulatory landscape that every taxprofessional must navigate.

65The professional staff commonly relies on economists toformulate regulatory policies. The original issue discount rulesfall into that category. Likewise, section 482 authorizes the IRSto adjust the income and deductions regarding transfers of


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Some regulations merely interpret statutes en-acted by Congress and provide much-needed guid-ance to taxpayers and practitioners and hence arewelcomed by the private groups most directlyaffected. (Interest groups definitely will lobby formore than just guidance; they also want morefavorable interpretations of the tax code. Occasion-

ally, they get their way.) On the other hand, Con-gress also commonly broadly delegates substantivelegislative rulemaking authority to the regulatoryauthorities. Scholars have considered the conditionsand circumstances under which Congress will del-egate legislative authority to an administrativeagency, but conclusions are tentative.66 However,that is a particularly common practice when itcomes to tax policy.67 The resulting legislative regu-lations have the full force and authority of law andare afforded considerable deference by the federalcourts.68

Ironically, in this budgetary climate of massivefederal budget deficits, regulatory tax policies have

become popular among legislators for the simplereason that they raise revenue. Regulatory revenueraisers are commonly paired in a single legislativepackage with unrelated legislation (distributive orredistributive) that reduces tax revenues or au-thorizes new spending. Regulatory tax policieshave become popular because they help offset thecosts of such tax cuts or spending programs. Thatpairing was once formally required under the payas you go rules set forth in the Budget Enforce-ment Act of 1990.69 Under pay-go, any tax reductionmust be offset by a comparable revenue increase orreduction to direct discretionary spending pro-grams; net revenue losses from all new legislationmust be offset by revenue enhancement or directspending cuts.70 Technically, pay-go only requiredannual revenue offsets, but the rule was translated

by then-Ways and Means Committee Chair DanRostenkowski and then-Finance Chair Lloyd Bent-

sen to require that any single legislative proposalresulting in a net revenue loss be coupled with anoffsetting revenue raiser in the same bill.71

The pay-go budget rule created an increaseddemand for regulatory tax policies that raise rev-enue. While it expired at the end of 2002, legislatorsremain under pressure to find revenue raisers tooffset the cost of new spending programs. A versionof pay-go was introduced as a standing rule of theHouse in January 2007. (True, the House proceduralrule has been easily avoided, as was the originalpay-go statute.72) Perhaps because of that, a new

goods, services, or intangibles between commonly controlledcorporations. The rules and regulations that govern transferpricing involve complicated economic adjustments intended toproduce results consistent with transfers between unrelatedparties. In litigation and settlement agreements, the respectiveparties (taxpayer and IRS) rely on their own teams of economicadvisers to navigate the technical requirements of the regula-tions promulgated under section 482.

66The various explanations and models put forth by scholarsare reviewed in Mathew D. McCubbins, The Legislative De-sign of Regulatory Structure, 29 Am. J. Pol. Sci. 721-748 (Nov.1985); see also McCubbins and Talbot Page, The CongressionalFoundations of Agency Performance, 51 Public Choice 173-190(1986). According to two observers, legislators will delegatelegislative authority to administrative agencies when the gainfrom the ability to shift the blame for the cost of regulationoutweighs the loss of the benefit to be claimed by the legislators.See Fiorina and Noll, Majority Rule Models and LegislativeElections, 41 J. Pol. 1081-1104 (Nov. 1979); see also Noll, TheBehavior of Regulatory Agencies, 29Rev. Soc. Econ.15-19 (Mar.1971).

67Perhaps the most famous case of an extraordinarily broaddelegation of legislative authority to Treasury and the IRS todraft regulations (which were never actually finalized) involvedthe task of promulgating regulations to distinguish debt fromequity for purposes of federal income taxation. Those legislativeregulations were authorized under section 385. The statuteauthorizes Treasury to issue regulations to deal with a perceived(and entirely unarticulated) problem. There is no other guidanceon the policy to be implemented.

68The difference between interpretive and legislative regula-tions in the field of tax law is discussed in Steve R. Johnson,Intermountainand the Importance of Administrative Law inTax Law, Tax Notes, Aug. 23, 2010, p. 837, Doc 2010-15990, or2010 TNT 163-4. Legislative tax regulations are afforded consid-erable deference under the Supreme Courts holding inChevron.The application of Chevron deference was modified by theSupreme Court in Christensen v. Harris County, 529 U.S. 576(1999) (limiting Chevron deference to legislative rules); andUnited States v. Mead Corp., 533 U.S. 218 (2001) (limitingChevrondeference to cases when Congress has delegated authority tomake rules carrying the force of law).

692 U.S.C.A. section 601 et seq. (Title 6, Budget AgreementEnforcement Provision), amending the Congressional Budgetand Impoundment Control Act of 1974, P.L. 93-433.

702 U.S.C.A. sections 633(c), (f), and 902. The Budget Enforce-ment Act of 1990 also provided for adjustable spending capsand caps on discretionary spending. Those were easily avoided.Nevertheless, pay-go was an effective mechanism wherebyCongress was able to impose some restrictions on the impulsesof its individual members to spend beyond the governmentscapacity to raise revenue. For a thorough discussion of theimpact of the pay-go rule, see Elizabeth Garrett, HarnessingPolitics: The Dynamics of Offset Requirements in the TaxLegislation Process, 65 U. Chi. L. Rev. 501 (Spring 1998).

71For years, the taxwriting committees continued to follow

that procedure even after Rostenkowski and Bentsen left Con-gress.

72The House pay-go procedural rule does not apply toemergency spending (as designated by the House itself). Like-wise, the rule does not apply to discretionary spending onlychanges to mandatory spending. Further, it does not apply topreviously enacted increases to mandatory spending, such asthose already scheduled for Social Security. Finally, the pro-cedure can be waived under a rule from Ways and Means,which was the case with the Economic Stimulus Act of 2008, P.L.110-185, which was estimated to decrease revenues by $152

billion in 2008. The $787 billion stimulus package enacted in





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statutory version of pay-go favored by Democratswas enacted on February 12, 2010.73 While thisanti-deficit rule can be evaded by many of the sametechniques that were used to avoid the old pay-gostatute and the House procedural rule, it maintainsthe strong demand for regulatory tax policies thatraise revenue. Recall that the Health Care andEducation Reconciliation Act of 2010 included sev-eral regulatory tax provisions with no connection tothe legislation other than that they helped offset thesignificant costs of the new program. One suchrevenue raiser codified the economic substancedoctrine, purportedly shutting down some abusivetax practices (for example, bogus tax shelters) andin the process, raising revenue for the treasury.74

The rules and regulations that implement regu-latory tax policies affect narrowly defined groups oftaxpayers while leaving virtually everyone elseunaffected. Rather than bestow an economic benefit(for example, lower taxes) on a narrow class of

beneficiaries (as is the case with distributive taxpolicies), regulatory tax policies impose an eco-nomic burden on those affected. Targeted taxpayersmight be an entire industry, an economic sector, ora small number of similarly situated firms. Thosetaxpayers adversely affected by a new regulatorytax policy have a strong incentive to organize andlobby against it. Consequently, whenever thosepolicies appear on the policy agenda, the lobbyistsand representatives for affected industries quicklyswing into action.75 Industry and economic sectors

are represented by their own expert legal advisersand tax professionals (lawyers and accountants), aswell as lobbyists. The governments staff may hearfrom their private-sector counterparts through com-ments offered at public hearings held for newregulations projects or through informal contacts,

but usually the contacts and bargaining are infor-mal. The governments professional staff often ispersonally familiar with the professionals repre-senting taxpayers. Many of those hired guns previ-ously worked for the government and left for morelucrative employment in the private sphere repre-senting those they once regulated.

The significant costs associated with organizingand lobbying to resist regulatory tax policies isusually shared by affected taxpayers through theirtrade associations or new organizations created forthe occasion. In rare cases, individual firms orpersons have a sufficiently strong economic incen-tive to bear the entire cost of opposing a newregulatory tax policy. Sometimes they succeed in

blocking or weakening regulatory initiativesthrough appeals to friendly representatives or sena-tors especially members of the taxwriting com-mittees. Most often, they do not. With all the newregulatory policies enacted in the past five decades,the federal tax laws and code of federal regulationshave swelled in scope and volume, thereby contrib-uting to the increasing complexity of the federal taxlaws.76

Redistributive Tax PolicyRedistributive policies generate their own dis-

tinctive pattern of politics and decision-making and

involve broad national policies that provoke intensepolitical conflict reflecting deep-rooted cleavagessuch as class, wealth, and region. Those conflictstypically play out at the highest levels of Americanpolitics on the floor of Congress and in nationalelections contested by the two major political par-ties. Ultimately, they are resolved only when amajority coalition successfully imposes its will onthe minority opposition. Among redistributive poli-cies, few have provoked as much controversy andacrimony as the decision to adopt a national income

February 2009 was exempt from the pay-go rule under theemergency spending designation.

73The Statutory Pay-As-You-Go Act of 2010 was enacted aspart of P.L. 111-139 and states that all new legislation taken as awhole that reduces taxes, fees, or mandatory expenditures mustnot increase projected deficits. As with the 1990 version, thesequestration provisions are not triggered by emergency costsassociated with legislation designated as such by Congress.

74P.L. 111-152, section 1409. The legislation included newsection 7701(o), which codifies the economic substance doctrineapplied by the federal courts. For a description of the measure,see Martin J. McMahon Jr., Living With the Codified EconomicSubstance Doctrine, Tax Notes, Aug. 16, 2010, p. 731, Doc2010-14844, or 2010 TNT 158-2.

75That is true for regulatory tax policy as well as most otherforms of regulation that affect private interests. Curiously,

former SEC Chief Arthur Levitt was surprised to learn from hisexperience that in the nations capital, highly organized interestswield extensive power over agendas and policy design:

During my seven and a half years inWashington . . . nothing astonished me more than wit-nessing the powerful special interest groups in full swingwhen they thought a proposed rule or a piece of legisla-tion might hurt them, giving nary a thought to how theproposal might help the investing public. With laserlikeprecision, groups representing Wall Street firms, mutualfund companies, accounting firms, or corporate managerswould quickly set about to defeat even minor threats.

Individual investors, with no organized labor or tradeassociation to represent their views in Washington, neverknew what hit them.

Levitt,Take on the Street: How to Fight for Your Financial Future 250(2002).

76The increase in the complexity of the tax law was noteddecades ago. For an account of the factors that have contributedto the increased complexity, see Surrey, Complexity and theInternal Revenue Code: The Problem of the Management of TaxDetail, 34 Law & Contemp. Probs. 673 (1969); Pollack, TaxComplexity, Reform, and the Illusions of Tax Simplification, 2Geo. Mason Indep. L. Rev. 319-359 (Summer 1994).





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tax in particular, an income tax with a progres-sive rate structure. By definition, a progressiveincome tax has a disproportionate impact on thewealthiest citizens, and not surprisingly, those ad-versely affected are strongly motivated (and havesufficient resources) to organize and resist such animpost through all available political means. Themore progressive the rate structure, the more in-tense the opposition. Without a mature party sys-tem to mediate the political conflicts triggered byredistributive tax policies, those targeted (for ex-ample, the powerful and wealthy) may resort to taxrebellions, protests, and generally more contentiouspolitics that is disruptive to the political system.That has often been the case elsewhere.77 Fortu-nately, the divisive issues raised by redistributivetax policy in the United States have been largelyresolved through elections and normal politicsrather than recourse to politics in the streets.78

The origins of the modern income tax can betraced to February 1913, when the states ratified the16th Amendment, granting Congress the authorityto tax incomes, from whatever source derived. Amodest income tax was enacted in October of thatsame year.79 With the constitutional issue resolved,a century-long political battle commenced over thedistribution of the federal income tax. Since theenactment of the modern income tax in 1913, its ratestructure has reflected shifts in the partisan affilia-tion of the electorate and the balance of power

between the political parties. With the ebb and flowof majority coalitions, the rate structure has shifted.During periods of one-party hegemony in Congress(for example, during the 1960s), rates have re-

mained relatively stable. When conservative majori-ties have emerged, Republicans have reduced taxesat the margin; liberal-left majorities have raisedtaxes on the wealthy. If politics as usual in

Washington is associated with distributive tax poli-cies (that is, tax preferences for organized interests),and regulatory tax policy is enacted by nonpartisanprofessionals in the executive branch, majorityparty politics is associated with redistributive taxpolicies that affect the progressivity and distribu-tion of the income tax. That has been the pattern ofincome tax politics for nearly 100 years. In thosepolitical conflicts, the underlying question invari-ably is who will bear the burden of the impost.Ultimately, that is the divisive political issue raised

by all redistributive tax policies.

Since 1913 there have been several distinct pe-riods of intense politics over the federal income tax.Those were triggered by changes in the electoral

bases of the major parties or in economic condi-tions. For instance, tax reduction first became a

basic tenet of the dominant Republican Party fol-lowing World War I, when Republican presidentialcandidate Warren G. Harding campaigned on aplatform favoring a return to tax normalcy. That

translated into repealing the extraordinary wartimerates that had soared to a maximum of 77 percent.Successive pro-business Republican administra-tions supported by congressional majorities heldthe maximum rate below 25 percent throughout the1920s.80 Following a major shift in the electorate anda reconstitution of the party system in 1932, the newDemocratic majority provided the Franklin D.Roosevelt administration with a mandate to use thetax code as a tool for redistributive policy. Themaximum marginal rate rose to 63 percent duringRoosevelts first term and reached 79 percent dur-ing his second. Indeed, the structure of the income

tax was one of the most politically divisive partisanissues of the New Deal.81

While New Deal redistributive tax policy was amajor wedge issue throughout the 1930s, WorldWar II put an end to the partisan bickering. Thefiscal crisis of war necessitated unprecedented bor-rowing by the national government and extraordi-nary tax increases for all Americans. By 1945, themaximum rate for individuals soared to a historic94 percent. Moreover, those wartime tax rates wereretained after the cessation of hostilities.82 As aconsequence, postwar American politics has beenmarked by intense partisan conflict over marginal

77The Bourbon monarchy of 18th century France and theimperial czars of Russia imposed high taxes on powerful socialand economic classes, thereby fomenting social revolution.Theda Skocpol, States and Social Revolutions: A Comparative

Analysis of France, Russia, and China (1979). Contentious politics(revolutions, social movements, civil wars, and violent ethnicconflicts) that occur when the political system cannot resolvedivisive issues is described in Charles Tilly and Sidney Tarrow,

Contentious Politics (2006).78That was not always the case, as local tax revolts and

rebellions were common during the period of the Articles ofConfederacy (1781-1788).

79Revenue Act of Oct. 3, 1913 (the Underwood-SimmonsAct), P.L. 63-16, chap. 16. The legislation was mostly concernedwith tariff reform. The income tax is found at Section II. Thestory of the politics behind the adoption of the 1913 income taxis told in Pollack, Origins of the Modern Income Tax, 1894-1913, 62 Tax L. __ (forthcoming Winter 2013); see also Roy G.Blakely and Gladys C. Blakely, The Federal Income Tax 71-104(1940).

80For an analysis of these tax cuts, see Gene Smiley andRichard H. Keehn, Federal Personal Income Tax Policy in the1920s, 55 J. Econ. Hist. 332 (1995).

81The definitive account of New Deal tax policy is Mark H.Leff, The Limits of Symbolic Reform: The New Deal and Taxation,1933-1939 (1984).

82Levels of taxation and government spending tend not toreturn to prewar levels following major military conflicts. For adiscussion of that ratchet effect, see Alan T. Peacock and Jack





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rates. The conflict has played out repeatedly innational elections during the late 1940s when aresurgent Republican Party took control of the 80thCongress and set out to roll back the wartime rates,and then again following the historic shift in thepolitical balance of power that carried Ronald Rea-gan to the White House.83

During Reagans first term, Congress enacted theEconomic Recovery Tax Act of 1981, which loweredthe maximum income tax rate for individuals to 50percent. While Reagan was later forced to acceptsome tax increases in the face of rising deficits, hesuccessfully lowered marginal tax rates. After hislandslide reelection in 1984, he again turned to taxreform. Against all odds, supply-siders in the WhiteHouse seeking lower marginal rates joined liberalDemocrats in Congress who were pushing for a

broader tax base to enact revenue-neutral tax re-form legislation.84 The result was TRA 1986, widelyhailed as the most significant reform legislation inthe history of the U.S. income tax.85 The legislation

dramatically reduced the maximum rate for indi-viduals to 28 percent and simultaneously repealed ahost of tax preferences enacted during the postwarera.

Despite Reagans success in lowering income taxrates, his successor in the White House, GeorgeH.W. Bush, was forced to accept modest tax in-creases in the face of rising deficits. That led to asplit between the moderate Republican administra-tion and congressional conservatives. Bush failed towin a second term in 1992, and the new Democraticadministration immediately proposed tax increasesfor those with high incomes. In his 1993 State of the

Union address, President Clinton called for a majortax increase on the wealthy.

The Revenue Reconciliation Act of 1993 wouldhave imposed a new maximum tax bracket of 36

percent for individuals with incomes exceeding$115,000 and a 10 percent surtax on incomes exceed-ing $250,000. Consequently, the maximum marginaltax rate for individuals would have climbed to 39.6percent, while the corporate income tax would havetopped off at 35 percent. As the administrationmoved forward with its proposal, the level of

partisanship and acrimony intensified. In early1993, the Ways and Means Committee reportedClintons plan. As has become the rule for contem-porary tax policy legislation, voting on the floor ofthe House followed strict party lines, and the mea-sure passed by the narrow margin of 218 to 216. Thenext day, a split vote in the Senate was decided byVice President Al Gore.

The legislation provoked a partisan responsefrom Republicans. With the GOP returning topower following the 1994 midterm elections, taxpolicy began to swing in the other direction. Acompassionate conservative from Texas would cap-ture the 2000 Republican presidential nominationand lead a majority coalition in favor of tax cuts atthe margins.

With George W. Bush eking out a victory, Repub-licans took back the White House after an eight-year hiatus during which the maximum marginaltax rate had increased 28 percent. Republicans alsotook control of

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