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Virtual currencies like bitcoin and ethereum, which are collectively valued around $2 trillion, offer investors a way to shield income from tax authorities.

In that way, the crypto economy contributes to the U.S. “tax gap” — the difference between tax paid and tax owed, according to the Treasury Department. The White House estimates a $7 trillion gap over the next decade.

There is an additional important feature of regulatory financial taxes - the potential impact of such taxes on and their interconnection with direct regulation. This interconnection constitutes, as mentioned in Part III, the third layer of the choice architecture of financial regulatory taxes.

In a broad sense, there are two aspects of this interconnection: first, both approaches are aligned as to their goals; and second, both approaches are functionally interdependent.

President Biden is expected to once again propose a wealth tax during his State of the Union, even after the idea failed to gain traction when Democrats controlled both houses of Congress.

But even if the so-called wealth tax fails on the federal, lawmakers in several states have introduced similar bills on the local level, including one in California. 

But while the voting bases of the two parties have changed some, and the thematic content of American commentary has changed a lot, the prosaic reality has changed very little. The main battle lines between the two parties are fixed around Democrats proposing more redistribution and Republicans proposing less. That reality has been highlighted once again by President Biden’s new plan to tax the income of billionaires.

Democrats have long wanted to find a way to tax wealth, since one of the problems with the tax code is that enormous fortunes can accrue and be passed from generation to generation without any tax at all. Figuring out how to tax that wealth presents both a technical problem and a political one.

Along with several other liberal Democrats in Congress, this week Massachusetts Senator Elizabeth Warren resurrected a wealth tax proposal. Called the “Ultra-Millionaire Tax”, the scheme would impose a 2 percent annual tax on the net worth of households and trusts between $50 million and $1 billion and a 1 percent yearly surtax (3 percent tax overall) on the net worth of households and trusts above $1 billion. Warren featured the idea during her 2020 presidential run, and we know how that turned out. 

The Senator’s press release featured all the usual utterances about rich people paying their “fair share” (a phrase that appears eight times in the release) and ticking off all the wondrous federal programs the booty would cover, such as infrastructure, child care, education, and so on. 

Now that Biden’s plan is on the table, the political battle over it has begun. If approved by Congress, funds would be distributed to states over eight years, or two presidential terms, instead of the usual 10 years. To finance the proposal, the administration has proposed a partial rollback of some tax breaks signed into law in 2017 by President Donald Trump, pushing tax rates on corporations from 21 percent to 28 percent, and raising rates on individual incomes over $400,000 and capital gains for the next 15 years.

Senate Minority Leader Mitch McConnell of Kentucky said not a single Republican will support what he called Biden’s “grab bag” plan, citing newly revived worries over the national debt. Party leaders have seized on Biden’s tax proposal as a flaw even though  show nearly two-thirds of Americans approve of raising the corporate rate to fund infrastructure. Nevertheless, Biden has quietly held talks with some Republican lawmakers in recent weeks, according to news reports, saying he’s open to negotiation “if possible.”

In addition to their revenue-raising role, taxes have also long been recognized as legitimate and powerful tools to regulate behavior.9 One might expect courts to heighten their scrutiny of taxes with intentional regulatory goals (as opposed to mere revenue-raising taxes) to ensure that the interests of regulated individuals are appropriately considered. However, this is rarely the case, even when the taxes’ revenue goals are insignificant compared to their regulatory goals.10

The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.

In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.

Overhauling the nation’s tax code in a once-in-a-generation opportunity, says House Speaker Paul Ryan, who is promising to act by the end of the year despite political divisions among Republicans and a crowded legislative agenda for Congress.

Ryan is scheduled to speak Tuesday afternoon to the National Association of Manufacturers.

5. Limitations for and barriers to the potential of environmental taxes

Notwithstanding the moderately positive conclusions on the potential of environmental taxation for enhancing transitions, we identify six barriers and limitations that should not be overlooked. First, public and political support for environmental taxation is limited. People dislike taxes in general (Avi-Yonah and Uhlmann 2009), and environmental taxation in particular, because they see it as an illegitimate source of revenue for the government (Green Fiscal Commission 2009). One way of making environmental taxation and green tax reform more acceptable is using insights from behavioural economics. For example, to make people accept a budget-neutral tax reform, the value of what they receive should be higher than the value of what they sacrifice. This phenomenon is called the endowment effect (Kahneman, Knetsch, and Thaler 1991). Second, an environmental tax in a socio-technical system such as the energy system will need to be implemented for a long period (more than 10 years) before it starts living up to its potential, for both technology and practices. However, politically this is a long period, and the environmental tax reforms that survive the first political decision process, are often reversed when a new government takes office. This happened to the Australian carbon tax in 2013 (Carl and Fedor 2016). A rare counterexample is the Swedish carbon tax, which has been in place since 1991 (Daugbjerg and Svendsen 2003). Third, choices made for or against a certain technology or practice will influence policy options in the future (path dependencies) (Rotmans 2003). Misalignment of a tax with the transition vision could result in a lock-in or even system breakdown (van der Brugge and Rotmans 2007; Kemp and Pontoglio 2011), although a subsidy poses a larger risk of a lock-in than a tax. Fourth, the lack of sufficient, appropriate or promising niches is a barrier, because niches that do not perform consistently will not provide any benefits (Sopha, Klöckner, and Hertwich 2013). Fifth, environmental taxes could have some undesired side effects, such as a negative competitiveness impact and a regressive impact. However, those deficiencies can be largely redressed by careful design and compensating measures as part of a green tax reform (Andersen and Ekins 2009; Klenert and Mattauch 2016). Finally, sixth, a stand-alone policy instrument, taxation or other, will always have a number of downsides, part of which can be overcome by using smart instrument and policy mixes (Oikonomou, Flamos, and Grafakos 2014), such as an environmental tax in combination with a large communication campaign explaining the benefits of the tax to citizens, and with revenue recycling, for example, a subsidy, to increase social support.

A group of 136 countries on Friday set a minimum  for big companies and sought to make it harder for them to avoid taxation in a landmark deal that U.S. President Joe Biden said .

The deal aims to end a four-decade-long "race to the bottom" by setting a floor for countries that have sought to attract investment and jobs by taxing multinational companies lightly, effectively allowing them to .

Ireland, Estonia and Hungary, all low tax countries, dropped their objections this week as a compromise emerged on a deduction from the minimum rate for multinationals with real physical business activities abroad.

‘No Teeth’

Under the worldwide approach, a country unilaterally imposes an FTT on all of the transactions for securities issued in the country, regardless of the location of the transaction or place of establishment of the parties and the intermediaries. For example, in 1964, the U.K. enacted a type of FTT (the British Stamp Duty Reserve Tax) on the transfer of ownership of shares of companies established in the U.K., regardless of the location of the transaction and the establishment of the trader. 124

The worldwide FTT tends not to cause relocation effects, because transactions remain subject to the tax even if they are shifted abroad. In addition, in the U.K., prevention of the risk of relocation is effected by a special "exit charge" of 1.5% applied when shares are transferred to clearance services or converted into financial products that are excluded from the scope of the tax. 125 A drawback to the unilateral application of a worldwide FTT is potential enforcement and collection problems with regard to taxable transactions carried out abroad.

The unilateral regulatory tax strategies that may be adopted by individual countries are especially vulnerable because they are exposed to (1) the substitution of taxable transactions with non-taxable transactions ("substitution effect") and (2) the relocation of transactions or firms subject to the regulatory taxes of other jurisdictions that do not impose such taxes ("relocation effect"). The most effective tool to counteract such opportunistic behaviour is for governments to act multilaterally and fully exchange information on the enforcement of regulatory taxes. Secrecy and lack of access to information are key enablers of un-cooperative behavior by countries that are used by firms to pursue relocation effects and prevent multilaterality. 55 Governments thus assign strategic value to tax information that concerns situations occurring outside their territorial reach, which specifically result in relocation effects, and therefore need information about relevant transactions relocated to favorable jurisdictions. Countries that, by exerting political pressure on these favorable jurisdictions, actually manage to obtain such information would be capable of counteracting [*619] the free-riding behavior of other countries that are willing to host relocated transactions which are taken out from the global reach of the financial transaction tax. However, given the growing interconnection of financial markets, countries' policies are increasingly influenced by external factors and, at the same time, individual countries cannot ignore the potential implications their conduct may have on the global market. This initial stage must therefore be followed by a second stage, in which comprehensive and coordinated interaction of most of the countries (multilateral cooperation) is pursued at the international level to prevent substitution and relocation effects and to achieve common goals.

But there are at least three types of ways in which companies may shift activity or profits abroad in response to a high cash flow tax. First, companies may shift more of their profits abroad without moving “real activity” (that is, employment and capital investment on the ground). Common methods are mispricing transactions between subsidiaries,64 strategic use and mispricing of debt among subsidiaries,65 or other accounting tricks that shift measured income from high-tax jurisdictions to low-tax ones. Another step to avoid high U.S. taxes without shifting real activity — and one with high political salience — is moving the corporate domicile abroad, known as inversion.66 Second, even projects earning the normal return might be shifted abroad in response to a high cash flow tax, if doing so makes it easier to shift existing rents to low-tax jurisdictions. Third, some projects may have the potential to earn rents in multiple locales. For those projects, high taxes on rents encourage moving real activity abroad.67 As a result, companies sometimes consider the statutory rate, even under a cash flow tax, leading them to potentially avoid locating rent-earning projects in a jurisdiction with a high cash flow tax rate, especially if the source of the rent is relatively mobile (for example, intellectual property).

Multinational tax avoidance has been a subject of political discussion in recent years, as there is growing evidence that multinational corporations (MNCs) pay little tax. The political pressure has been exacerbated by the revelations from Panama and Paradise papers in 2016 and 2017 that exposed details of some of the tax avoidance schemes to the public. Despite efforts to curb such practices, with countries around the world adopting various anti-tax avoidance measures and the Organisation for Economic Cooperation and Development (OECD) championing the Base Erosion and Profit Shifting (BEPS) initiative, the extent of profit shifting has been increasing over time. Hence, it is unclear how effective these measures are. Even less is known about how anti-tax avoidance measures affect business activities of multinational firms besides profit shifting activities.

Profit shifting generally takes three major forms: debt shifting, transfer pricing and patent reallocation. Allocating debt across different tax jurisdictions is one of the most popular methods that MNCs use to lower their overall tax burden. A subsidiary of an MNC can internally borrow money from its low-tax subsidiaries and reduce tax payments by paying interest on that debt. Interest is tax deductible; hence, it reduces firms’ taxable income. When these payments flow from high-tax countries to low tax countries, this reduces firms’ overall tax bill.

Funding cuts have also reduced the IRS’ ability to detect and prosecute tax evasion and corruption. Cases brought by the IRS’ criminal division have dropped by about a quarter since 2010.[12] As ProPublica notes, recent high-profile prosecutions for tax evasion, including of Paul Manafort, Michael Cohen, and Michael Avenatti, occurred because they attracted the attention of federal investigators for other reasons.[13] Such trends may, in turn, hurt anti-corruption efforts more generally: as an OECD-World Bank report notes, “[while] viewed as distinct crimes, tax crime and corruption are often intrinsically linked.”[14]

Funding cuts that hobble IRS enforcement and empower the well-resourced to game the tax code not only shrink federal revenue, but also undermine honest filers’ confidence in the integrity of the tax system. This is a serious threat to a system that relies on voluntary compliance.

As the U.S. economy recovers from the disruption and damage of Covid-19, the Internal Revenue Service is struggling through a filing season unlike any other in history. The agency is under tremendous strain thanks to the enormous extra burden associated with sending out three rounds of stimulus checks; coping with other pandemic-related changes to the tax code (such as the belated exemption of the first $10,200 in 2020 unemployment benefits from federal tax and new tax credits for employers); staffing shortages; the challenges of remote work by its own employees and a leftover backlog of still unprocessed 2019 paper tax returns.

That’s not to mention the abnormally high number of 2020 individual 1040s that will require special manual processing through the IRS’ so-called Error Resolution System (ERS) thanks to Congress’ decision to allow taxpayers to use their 2019 income—instead of their 2020 numbers—to claim the Earned Income Tax Credit or Additional Child Tax Credit for 2020.

Last week, the Internal Revenue Service (IRS) was inundated with millions of returns from taxpayers who received a brief reprieve with the 30-day extension of the tax filing deadline to May 17. While nobody professes love for the IRS, it is important to recognize the government agency that has been working tirelessly since the beginning of the COVID-19 pandemic and has shouldered a much-expanded workload. While more than 158 million American households wait for the latest round of stimulus checks administered by the agency, the IRS also continues with its usual tax administration duties. Not surprisingly these herculean tasks have highlighted the agency’s prior struggles and needs, drawing the attention of both the Biden administration and Congress.

Over the years, even before the pandemic, various reports have discussed how recent budget and staffing cuts have impacted the effectiveness and quality of certain IRS services. According to some estimates, the agency’s budget has fallen by 20 percent in inflation-adjusted dollars since 2010, resulting in the elimination of 22 percent of its staff. At the same time, the number of taxpayers has grown, and shifts in global economic structures have resulted in changes to the mix of income sources the agency has to deal with. These changes have made it more difficult for the IRS to effectively carry out its core function of revenue collection. A just-released paper by the American Council for Capital Formation highlights some of these issues.

Third, the political economy of taxation could interfere with this "natural" approach to redistribution. Obviously, taxing the poor to provide for the poor makes no sense. Yet taxing the rich to provide for the poor could be problematic because the rich have the resources and the incentives to fight changes in the tax code, and then to evade enacted modifications through the use of loopholes and shelters. Although the empirical question of whether raising marginal tax rates on the wealthy meaningfully increases revenues remains unanswered, 11 the assumption here is that political leaders have largely made up their minds about the difficulty of taxing the rich to pay for the poor. As a result, even if the rich could be taxed successfully to generate revenues for the sake of redistribution, practically, this may no longer be possible. This situation leaves the Rawlsian legislator with a last option: taxing the middle class. Any Congressman interested in re-election under this anti-tax polity has to know that arguing for increases in middle-class tax rates could amount to virtual political suicide. 12