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Taxes are necessary to fund worthy government activities, but taxes come with side effects. The side effects can be especially harmful in an economy where businesses enjoy monopoly power.

People and businesses individually attempt to reduce their tax burden by doing less of the activities taxed at high rates and more of the activities tax at low rates or by doing activities that aren't taxed at all.

(iii) Complexity: Adopting differentiated commodity tax rates can be socially advisable if it proves to be too complicated (i.e., costly) to tax every kind of good or service. Certain goods or services may be difficult to tax, or taxes on these goods or services may be difficult to enforce (for example, due to monitoring or measurement difficulties). For example, services and intangible property are typically not taxed under U.S. state sales tax for this reason; 139 financial services are not always taxed under VAT systems for a similar reason. 140

An excess-profits tax on financial firms is, in some ways, a policy option that can be used also for purposes other than those indicated above. In the past, excess-profits taxes have been used by the U.S. government to target specific industries, such as oil companies, 78 but they and now can be applied to the financial industry as well. 79 Such a tax could be levied on the profits of financial companies that are above a normal rate of return for the industry, defined as the compounded amount of interest accrued on debt and a notional return of equity. 80

The main issue in designing an excess-profits tax for the financial sector is the definition of the notional rate of return of equity. This implies a quite complex comparability analysis similar to that deployed in transfer pricing and aimed at finding financial institutions with identical or nearly identical features in terms of size, fees charged, and the type, amount, and frequency of transactions. This in turn requires significant administrative effort and a high compliance burden, which may affect the feasibility of the tax.

Professor Lawrence Zelenak, in Maybe Just a Little Bit Special After All?, offers a more blunt (if qualified) critique of those who gleefully “danc[e] on the grave of tax exceptionalism.”36 It’s not just tax lawyers who believe tax is special, Professor Zelenak argues. Rather, pretty much everyone views tax as a “uniquely byzantine”37 area of the law, and the frightening complexity of the Internal Revenue Code perhaps earns it some special treatment.

It’s hard to dispute that the tax laws are difficult to understand, but the widespread recognition of that complexity probably stems more from the annual filing requirements than from tax law’s complexity vis-à-vis other areas of code-based law. If, à la the filing of a Form 1040, every individual had to annually determine the priority of her creditors’ claims under the bankruptcy code or had to measure her vehicle’s pollutants under the environmental laws, complaints about bankruptcy complexity or environmental complexity would permeate popular culture, just as complaints about the tax laws do. And although many lawyers express fear of tax even outside of the filing context—in shying away from enrolling in tax courses during law school, for example38—that probably has more to do with the heavy focus of the common law tradition than tax law’s unique complexity. That is, the law school curriculum, especially during the first year, displays a heavy bias towards reading judicial opinions and away from careful statutory analysis. Thus, in their formative first year, law students are taught to view the world through the lens of an English common law judge,39 and they naturally come to believe that tax, with its focus on statutory and regulatory interpretation, reflects a quirky and unique body of law.

Taxpayers facing civil action by the IRS deserve more than an opportunity to get lost in the enigmatic labyrinth of the Internal Revenue Code before having their taxes improperly assessed. Tax enforcement has never been extraordinarily clear on where a civil action ends and criminal prosecution begins, and that problem has persisted to this day in areas such as tax fraud. 264 The Tax Court has likewise faced difficulties in categorization and authority, and by its very operation seems to perpetuate the idea of tax exceptionalism, for better or worse. 265 The Supreme Court has acknowledged some bleed between civil and criminal law in certain circumstances, and has recognized a right to paid counsel in particular civil situations. 266 This Note advocates the recognition of that right in one other situation--one in which the subject matter, parties, and forum all lend themselves to its extension.

There is, however, promising bipartisan recognition that IRS enforcement funding is too low, and that the revenue gains from added enforcement funding would more than offset the cost. Lawmakers can build on this to restore adequate funding for the core government function of collecting taxes owed under law. Lawmakers should also pursue meaningful tax reform that strengthens the integrity of the tax code, raises revenue, and boosts workers’ and families’ incomes.

IRS Enforcement Severely Depleted

IV. Other considerations when revising corporate tax policy?

It might be worth considering the effect of CIT policy in the wider international context. Because the CIT is such a competitive tax, incentivizing production and capital movement based on lower tax rates, any proposed changes to the CIT may have to be instituted internationally. Such reforms are generally organized through the Organization for Economic Cooperation and Development.42 It would be very hard, in a practical sense, for any major change in CIT structure to happen nationally, as there would be major incentives for corporations to flee the newly reformed area in search of more competitive rates, especially if the newly reconstructed CIT would have the effect of better capturing corporate income (or income earned by shareholders). On April 5, 2021, US Treasury Secretary Janet Yellen advocated for a global minimum corporate tax.43 Politically this message was conveyed to ensure a decrease in jobs shifting overseas and a “race to the bottom on corporate tax rates.”44 In fact, just two days after Yellen’s address, the G-20 announced that it hopes to come to an agreement on global minimum low tax rates by mid-2020.45 This does suggest that a major overhaul of the national corporate tax regime in accordance with the aim of taxing shareholders more directly would be more doable, as it looks like there is going to be a major reconfiguration of the global corporate tax regime. Furthermore, after such international reforms, there would be less incentive to move outside of the US in search of marginally lower rates, even if the US tax regime was more efficient at taxing wealthy shareholders.

Corporate tax policy has had many, often concurrent, policy justifications over the decades, from distributive justice to market stimulation and regulation. Furthermore, there are major political justifications for this a tax, which makes the finding of this exact goal difficult.1 The US Corporate Income Tax (CIT) is not the only tax policy with indeterminate justification, but the addition of such polarized public views on the topic frustrates this endeavor greatly. Brauner rightly points out that the CIT is one of the more popular taxes, politically speaking. 2 Indeed, around 52% of Americans believe that the corporate tax rate should be increased.3 This indicates that around half of the American populace believe that corporations should be paying their fair share, whatever that may be. What qualifies as a fair share, however, is hard to quantify, especially given concerns that such a tax may not actually felt by corporations. Put another way, the incidence of the CIT is not clearly known, and this statement is acknowledged by both critics and proponents of the CIT, even though both will stress this fact differently in order to make it fit their view point. 4 It has been proposed by Avi-Yonah that the corporate tax should be modified to look more like the original CIT that was adopted in 1909. This would mean a steeper progressive rate system and the grand aim of disincentivizing monopolistic behavior.5 This paper seeks to reject this particular modification of the CIT. Though the deterrence of monopolistic behavior is admirable, it may be done better through more direct means and regulatory action. Furthermore, this paper will investigate the other myriad of justifications proposed for the CIT, and then discuss which justifications coincide with the policy aim of taxing wealthy corporate ownership. Taking the view that the actual, correct policy aim of the CIT is to tax corporate shareholders (i.e. the wealthy owners of the corporation), this paper will seek to evaluate all iterations of the CIT (as is and as proposed herein) by such standard.6 Thus the modifications proposed by AviYonah in order to tax monopolies are close to this correct purpose of the CIT, but are a bit too indirect and do not capture all corporate profit. Moreover, this paper will not try to propose a new type of corporate tax; the goal of this paper is to merely discern the best aspects and justifications for the CIT in hopes that it may shed some light on current corporate tax policy and debate.

I. What are the aims of the CIT?

The United States has one institutional characteristic that is sometimes thought to be a distinctive safeguard against centralizing tyranny: the constitutional diffusion of governmental authority between the national government and the several states, or federalism.368 Federalism is both anointed as democracy’s savior, and also condemned as a handmaiden of local tyrannies.370 The North Carolina election law, for example, provides some cause for the latter concern.371

The existence of subnational entities wielding substantial regulatory authority and possessing considerable regulatory capacity means that states and certain localities will almost certainly play a necessary role in any process of constitutional retrogression—or in the narrative of a failed attempt at such backsliding—at least in terms of the negotiations they force from the federal government.372 But we think it is uncertain ex ante how federalism (or localism) will influence the trajectory of retrogression. It is possible that states will serve as salutary platforms for alternative, antiauthoritarian politicians and coalitions in the manner that Heather Gerken has suggested.373 For many policy areas, states and cities have the power to slow implementation and even nullify federal law.37

Examples of uncooperative federalism abound. For example, red states and blue states alike objected to some of the PATRIOT Act’s expansive surveillance and detention rules as an attack on civil liberties. Rather than just complaining, they instructed their officials not to collect or share certain information with the feds unless the actions accorded with the states’ constitutions. Or consider marijuana. Federal dependence on the states is so pronounced in criminal law that Vanderbilt law professor Robert Mikos has argued that states can “nullify” federal marijuana law by withdrawing enforcement resources. Colorado and Washington have already done so. These changes may be entrenched enough that even Jeff Sessions’s marijuana-hostile Department of Justice won’t be able to change the equation. On other occasions, states have avoided a head-on confrontation with the feds and instead waged wars of attrition. For example, consider the response to the No Child Left Behind Act, perhaps the centerpiece of George W. Bush’s domestic policy. States accepted the federal grant money, but slow-walked reforms and often fudged testing standards. Their recalcitrance won out: The Bush Administration gave up and granted states so many waivers that they effectively gutted the federal program. The war has continued with the Obama Administration, which has struggled to rope states and localities into cooperating with its education agenda.

The role of state legislatures in national affairs has become both more prominent and more conflictual in recent years. Due to various political forces—partisan polarization, the Trump presidency, Republican gains in Congress beginning in 2010, congressional gridlock, and growing overlap in federal and state spheres of authority—blue states are resisting federal policies in arenas such as immigration, tax reform, and marijuana as well as filling in the vacuum left by federal inaction on progressive priorities such as the minimum wage and gun control. Meanwhile, red states are increasingly preempting blue-city policies—ranging from antidiscrimination to environmental laws—with the effect of shoring up the GOP’s policy agenda.1

Republican control of national government has contributed to a dramatic realignment of partisan positions on matters of federalism in recent years (Goelzhauser and Rose 2017). Although the GOP traditionally championed states’ rights, the Trump administration has sought to impose wide-ranging national policies that implicate the states, from stricter enforcement of federal law against the use of marijuana to executive orders restricting immigration. Meanwhile, Democrats—long champions of federal policy intervention—having lost control of the national government, concluded “they have no alternative but to redouble their efforts at the local level” (Rosen 2016). Although “progressive federalism” had long been an oxymoron, at least since the New Deal, the Trump era seems to have prompted a liberal reawakening to the advantages of localism as a tool for resisting the encroachments of an assertive national government.

That kind of state leverage allows for what Gerken and a colleague called uncooperative federalism, where “states use [their] regulatory power … to resist federal policy.” It’s an especially effective strategy in areas where the federal government lacks the ability to carry out policies itself, Gerken explained. With Obamacare, the federal government didn’t have the apparatus to run a fully federally funded system and needed the states to step in; not all cooperated. The Trump administration hasn’t always been able to enforce its immigration policy for the same reason: not enough actors to carry out the policy, and thus vulnerable to states that don’t cooperate.

For liberals, progressive federalism, as an idea, is a promising alternative to legislative setbacks at the national level. In the words of Pittsburgh Mayor Bill Peduto, cities can act as “urban labs” where programs that are “suffocated” in Congress “can be sent to grow.” While the Progressive Era of the early 20th century used the power of the federal government to enact social and economic reforms to lessen the negative effects of industrialization, today, progressive federalism takes advantage of decentralization and aims to use the power of state and local governments as tools against the Trump administration.

Perhaps the most controversial of the gun-related items, HB 1076 would ban state agencies from enforcing any new federal gun laws, including background checks. The bill passed the Republican-led House on a largely party line vote Monday, but legal experts say the attempt to “nullify” possible future federal laws likely wouldn’t pass the scrutiny of the U.S. Supreme Court.

“That’s absurd beyond the word absurd. I like the author personally but that’s just pure political grandstanding,” said state Rep. Lon Burnam (D-Fort Worth).

But while states are not powerless in the face of federal law, there are limits to what they can do to prevent enforcement of constitutionally valid regulation.

The bills are based on the theory of nullification, which has its roots in the late 18th and early 19th centuries and holds that the federal government exists by the will of the states, and that states therefore have the right to decide which federal laws are constitutionally valid within their borders.

In the eyes of most legal scholars, however, the efforts are unconstitutional.

“The states can’t simply choose to defy and override a valid federal law,” said Allen Rostron, a professor of constitutional law at the University of Missouri-Kansas City.

Earlier this week I took Steve Benen to task for suggesting that state governments could not refuse to enforce federal laws. Benen had suggested that such decisions were tantamount to nullification. (A claim he has walked back, to his credit.) While Benen’s outrage was a bit misplaced in the post I critiqued, it’s not as if his concerns about nullification are unwarranted. Some state legislators are engaged in efforts to nullify federal law.

Perhaps the latest example is this bill, which recently passed the Missouri legislature. After reciting the importance of the Second Amendment and declaring that state officials cannot enforce federal gun laws, it goes on to make it a misdemeanor for a federal official to enforce federal law within the state. This is an attempt at nullification, and it’s completely unconstitutional. States may retain the right to refuse to assist the federal government, but states do not have the right to obstruct (let alone criminalize) federal enforcement efforts (nor do they have the power to authorize civil causes of action against federal officials who are enforcing federal law, as this bill does).

The arguments for state and local governments to stay completely out of matters relating to foreign affairs include the following.

First, the vital national interest in the effective and efficient achievement of U.S. foreign relations objectives requires that other nations perceive our foreign policy as unified and coherent -- that our nation "speak with one voice." Consequently, state and local involvement in international issues, particularly if not in accord with administration policy, may undermine the conduct of U.S. foreign relations and the credibility of our negotiating posture by conveying the appearance of disagreement, confusion, uncertainty and weakness in our Government's stated foreign policy positions.

Nullification Lacks Legitimacy and Has Been Rejected by the Supreme Court

Though written by revered Founding Fathers, Jefferson and Madison, the Kentucky and Virginia Resolutions earned only negative response from the North and gained no traction in the South. Richard Hofstadter, The Idea of a Party System: The Rise of Legitimate Opposition in the United States, 1780-1840 117-18 (1969). In fact, the Resolutions were never endorsed by another state, and were affirmatively rejected by ten states. Card, 2010 B.Y.U.L. Rev. 1795, 1809. As noted above, during the Nullification Crisis in South Carolina, Madison went to great lengths to distance himself from the nullifiers. The South Carolina movement failed to gain support from any other state. Card, 2010 B.Y.U.L. Rev. 1795, 1811. More than a century later, despite a handful of southern states that endorsed nullification as a response to federal desegregation orders, the legal community and courts thoroughly repudiated the doctrine. Card, 2010 B.Y.U.L. Rev. 1795, 1812; Cooper v. Aaron, 358 U.S. 1, 17 (1958). The unanimous Court in Cooper quoted former Chief Justice Marshall who, speaking for a previous unanimous Court, said “If the legislatures of the several states may, at will, annul the judgments of the courts of the United States, and destroy the rights acquired under those judgments, the constitution itself becomes a solemn mockery . . . ." Cooper v. Aaron, 358 U.S. at 18 (quoting United States v. Peters, 5 Cranch 115, 136 (1809)). In other words, states cannot nullify federal laws.

The interlopers were officially called “corporate fellows” in the lingo of the event, but most Americans would probably just recognize them better as lobbyists—well-paid ear-benders working to place their clients’ interests before the state’s most powerful elected leader. They form the backbone of the policy arm of the NGA, which has played a role in crafting some of the most significant bipartisan policy solutions in the nation’s history, like the now-fraught Common Core education standards. And their constant presence was one of the few unifying presences at an organization increasingly riven by partisan divisions. 

But in recent years, governors and staff say, even the constant presence of influence peddlers has begun to wear on the members of the NGA, as the organization has lost influence, driven by concerns about a slow-moving organization and growing polarization among the governors, who increasingly favor party-specific Governor gatherings. 

Progressive federalism isn’t a cure-all, of course. The president is more than capable of causing harm with a stroke of the executive pen. Heavily indebted states and cities may find resisting the federal government too expensive. And cities and state governments have other important business to address.