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The Internal Revenue Service has a lot riding on getting the people it needs into the agency.

The agency is using the unprecedented funding it received from the tax, climate and health care bill known as the Inflation Reduction Act for a hiring surge it has said could generate as much as $851 billion in new revenue as additional, and more seasoned, auditors force more high-income individuals and corporations to pay the taxes they owe.

4. Conclusion: Constructive Unilateralism or Multilateralism?

The above has been an attempt to suggest that unilateral actions by the US have historically played a positive role in constructing the international tax regime, and some suggestions for further US unilateral actions that could also be constructive.

The nonprecedential status of these Tax Court opinions gives rise to practical problems, however. A judicial exposition of a case is difficult to ignore, and taxpayers frequently invoke Memo or S opinions as authority in connection with their tax disputes, whether in front of the IRS, the Tax Court, or other federal courts. And the Tax Court seemingly cannot ignore its own opinions. Although plenty of cases dismiss Memo opinions as nonprecedential, other cases treat them like persuasive or binding authorities. More troubling still, Memo opinions sometimes address controversial issues of tax law, and not only heavily factual or clear-cut legal issues. The ambiguous weight of Memo opinions thus sows confusion in the tax law.

When regulatory tasks are reallocated, or a new agency is inserted into the mix, or new powers are given to an existing agency, there is a significant potential to disrupt this regulatory ecosystem. Disruption can take a variety of forms. The new entrant may siphon off money and personnel, making it difficult for incumbent agencies to perform their existing responsibilities. Reallocation of authority may also upset longstanding understandings that formed the basis for fruitful inter-agency collaboration. The entrant may receive a substantive mandate whose formal commands resemble the language that appears in the statutes of other regulatory authorities. The interpretation of the new entrant’s mandate in one judicial could spill over into the interpretation of the mandates of other agencies in separate cases.

The challenges of operating within the planet's carrying capacity call for an urgent transition towards sustainable consumption and production (Sustainable Development Goal 12). Regulatory instruments, one of the backbones of policymaking, have received limited attention in recent sustainability transitions research compared to more novel and experimental instruments (Bachus and Vanswijgenhoven, 2018; Kohler ¨ et al., 2019; Soininen et al., 2021). Ambitions to make them more transformative have been voiced in the political fora. For example, the European Commission (EC) aims to “ensure that the regulatory framework is… fit for a sustainable future, that the new opportunities from the transition are maximised, while minimising burdens on people and businesses” (EC, 2020, p. 3). But how do regulatory instruments, in fact, contribute to sustainability transitions?

The preparation and implementation of regulatory instruments establishes control over activities through formal and informal orders, laws and standards (Baldwin et al., 2012; OECD, 2018, 2022). So far, regulatory instruments have been considered, in a rather simplified manner, as means to facilitate transitions (Soininen et al., 2021). In this paper, we refine the conceptualisation and roles of regulatory instruments in sustainability transitions, meaning profound change processes in the consumption and production patterns (e.g., Van Oers et al., 2021; Lazarevic et al., 2022). To do so, we develop a novel approach by bringing together the theoretical approaches on intervention points (Kanger et al., 2020) and on the roles of law (Soininen et al., 2021). Intervention points are particular areas where a policy instrument can bring about transformative change in the socio-technical system (Kanger et al., 2020). Intervention points show where the political emphasis is, which can help to identify strengths and weaknesses in existing policies. The approach focuses on the catalysing role of policies and changing the system directionality. However, we argue that the intervention point approach does not by itself articulate well the fact that the change may vary — policies meant to catalyse a transition can end up altering its trajectory, slow it down and even stop it altogether. To uncover these aspects and to deepen the analysis of how regulatory instruments contribute to sustainability transitions, we propose assessing the six intervention points from the viewpoint of the different roles – steering, accelerating and braking (Soininen et al., 2021) – that law mXZay have in transitions.

The Constitution itself imposes very few limits on the taxing power, Unless it is clear that it is not possible to impose taxes that are not intended to pay the Debts and provide for the Common Defense and General Welfare of the United States ”. Goods exported from a State may not be taxed.17 Direct taxes must be apportioned among the states by population18 and indirect taxes must be uniform.19 The only significantly disputed item is the definition of “direct” tax, which in Pollock (1895) led to the Court striking down the second US income tax as unconstitutional, but this decision was reversed by the adoption of the Sixteenth Amendment in 1913.20 There is still some debate among scholars about whether an unapportioned federal wealth tax would be constitutional.21

Nor has the Supreme Court22 imposed significant limits on the power of Congress under the Taxing Clause. The Court has emphasized the sweeping character of this power by saying from time to time that it “reaches every subject,”23 that it is “exhaustive”24 or that it “embraces every conceivable power of taxation.”25 The few subject matter limitations imposed in the past have been overruled.26 Most strikingly, since 1920 the Court has refused to rule any federal income tax statute unconstitutional.27

The first decision point that the game presents is the decision of whether or not the agency should threaten to launch its regulatory nuke. “A threat is a response rule that punishes others who fail to cooperate with [the person making the threat].”180 Schelling noted that “[s]uccessful threats are those that do not have to be carried out.”181 As President John F. Kennedy said of nuclear weapons, “Today the expenditure of billions of dollars every year on weapons acquired for the purpose of making sure we never need them is essential to the keeping of peace.”182 Carrying out threats imposes a higher cost to everyone involved.183 In this way, “a promise is different from a threat. . . . [A] promise is costly when it succeeds, and a threat is costly when it fails.”184 So, of course, the agency hopes that the target will buckle when threatened. The art of making a threat to launch a regulatory nuke is in making the threat credible and serious enough that it manipulates the target’s behavior by altering the target’s belief about how the agency will act if the target does not comply. As a reminder of how the threat fits within the larger game, the threat decision node is highlighted in Figure 3.

<<FIGURE 3 OMITTED>>

As discussed above, one way to think about Congress’ decision to delegate regulatory nukes is to see it as attempting to make a credible commitment. In making that decision, Congress can attempt to increase its credibility by providing binding instructions of when the weapon must be used (Schelling, 1980/1960, 29). It can also increase the credibility of its threats by delegating the program to an agency that is viewed as committed to stringent enforcement (Moe, 1989). Congress might take it a step further and allow additional third parties to enforce the regulatory scheme. This is, for example, a large part of how environmental statutes are enforced today: Congress has given citizens and interest groups the right to sue for violations of the law and to force agencies to follow through with the role Congress assigned to them.

One of the major contributions of Schelling’s work was to help us understand why it is that some threats are more believable than others and how we might finesse those threats that do not seem credible to make them more believable. In summarizing his thoughts on this subject, Schelling said,

We have learned that a threat has to be credible to be efficacious, and that its credibility may depend on the costs and risks associated with fulfillment for the party making the threat. We have developed the idea of making a threat credible by getting ourselves committed to its fulfillment, through the stretching of a ‘trip wire’ across the enemy’s path of advance, or by making fulfillment a matter of national honor and prestige…. We have considered the possibility that a retaliatory threat may be more credible if the means of carrying it out and the responsibility for retaliation are placed in the hands of those whose resolution is strongest…. (Schelling, 1980/1960, 6).

While one may quibble with the extent that Congress’ threats are credible in this instance, one thing that seems clear is that Congress’ threat is much more credible as part of the Clean Air Act than it would have been had Congress made the threat without passing legislation. Congress increased the risk that its threats would prove more than cheap talk because it is much more difficult to revisit legislation than to get in the way of Congress coming back to an issue at some point in the future.

What Congress seems to be doing here is precisely what Schelling advises us to do when trying to make a threat that seems patently incredible:

The traditional rules of thumb had to do with inadequacy of the legal remedy. Inadequacy of the legal remedy is a complex congeries of considerations of difficulty of valuation, inconveniences of repeated litigation, potential undermining of the right, and so on.22 The trigger for equity here would be the inadequacy of the legal remedy (which could stem from a variety of factors). Although this has been regarded as a vacuous “rule” because one can find examples of almost any kind of situation leading to an injunction,23 there is more to say in favor of this trigger for equity.24 As I have argued elsewhere, inadequacy of the legal remedy (or alternatively irreparable injury) is best regarded as a trigger for a complex equitable analysis. It shows that we have entered meta-law, where a different, more interactive and openended style of analysis is exceptionally called for.25 Also relevant to an injunction would be disproportionate hardship—does the injunction visit far more harm on the enjoined party than the small benefit it affords the movant? A range of third-party effects are also relevant, sometimes traveling under the heading of public policy. And key to the availability of an injunction or a defense would be the good faith and absence of unclean hands on the part of anyone seeking to benefit from any equitable remedy or defense.

Drawing on the strengths of each of its members and each of its partners in both government and private industry, the Department’s enforcement efforts against IP crime are more strategic, collaborative, and impactful than ever before. The Task Force will continue to support the Department’s coordinated approach to effectively combatting IP crime in the United States and abroad— working to identify and evolve the Department’s response as criminals continue to advance their schemes.

3. Regulatory tax laws are a suitable measure for regulation of the credit institutions. While making decisions on certain behaviour model in the credit institutions, the economic arguments usually prevail, and the activity of the credit institutions is relatively insignificantly affected by morals – values. The regulatory impact of the tax laws on the credit institutions is justified by regulation of economic conditions of decision making rather than classifying a certain behaviour as legal or illegal, therefore, the tax laws allow a legislator to regulate the decision making process itself. Certain behaviour model is forbidden by imperative administrative orders by making it illegal with the help of the laws, however, the causes (economic motives) of the illegal behaviour model are not always eliminated, and this weakens the regulatory impact of the administrative orders and reduces their effectiveness. Regulation of the credit institutions by the tax laws, unlike traditional method of legal permissions or prohibitions, allows ensuring the significantly lower extent of forced nature of legal regulation and decreasing the risk of possible legal conflicts.

4. The tax laws might be used both as individual measure for regulation of the credit institutions and as additional measure for regulation of the credit institutions together with the current legal regulation of the credit institutions. Regulation of the credit institutions by the tax laws might significantly improve the possibilities of a legislator to regulate the risky activity of the credit institutions and to ensure the stability of financial sector. The regulatory impact of the tax laws can be better directed towards all activity elements of the credit institutions than the administrative orders, prevailing in regulation of the credit institutions. More accurate regulation allows ensuring constant and easier effect on the financial condition of the credit institutions, and enables to improve the solvency, liquidity and panic resistance indicators. In case of regulating the activity of the credit institutions, the tax laws allows achieving the same regulatory effect as the administrative orders, however, by keeping the variety of the credit institutions and more freedom than in case of regulating the activity of the credit institutions by legal prohibitions and permissions, therefore, the tax laws should be considered as proportional measure of regulation of the credit institutions. What is more, the price of possible error, made by a legislator, will be significantly lower because of the features of the regulatory impact of the tax laws than in case of regulating the same relationships by prohibitions and permissions.

It is important to distinguish between corrective taxation that aims to internalize negative externalities, and tax penalties that are used to ensure compliance with a particular rule regardless of the externalities involved. 211 A sufficiently high tax penalty can be used to enforce a de facto ban or obligation. For example, the 30 percent withholding tax imposed on certain payments to non-participating foreign financial institutions under the Foreign Accounting Tax Compliance Act was adopted as a tax penalty to achieve the full cooperation of foreign financial institutions. 212 One consideration that might support using tax penalties rather than a ban is the political ability to legislate these penalties. Another consideration is institutional: which agency should enforce this rule? The IRS is likely to enforce the tax penalty, whereas the SEC is more likely to enforce a ban imposed on publicly traded firms. 213

It is possible that the intercorporate taxation in the United States is a tax penalty that operates as a de facto ban, although it still allows pyramidal structures where the benefits are large enough. A few years ago, Israel adopted a ban on a pyramidal structure with more than two levels. 214 A controlled firm can control no more than one other firm. 215 If the lower firm controls another firm, a court will appoint a trustee to sell the remaining firm. 216 The Israeli legislature considered and rejected following the American model of taxing the intercorporate dividends. 217 It is unclear which model is superior, though it seems that either a ban or a tax penalty that is high enough can achieve similar results.

In the first alternative, the paper discussed the set of sections dealing with accumulated earnings. 217 One of the advantages of tax law is attributable to its importance in the decision-making process and in that respect, it is an efficient regulatory mechanism. 218 Tax considerations are fundamental to individuals and entities in making business decisions, and they generally react rather promptly to tax reforms. 219 Tax law is a fundamental consideration taken by taxpayers -- especially business persons -- before and in the course of their activities. 220 Thus, it is plausible to assume that the additional tax imposed on corporations for their accumulation shall induce entities to distribute their earnings. 221 Namely, corporations are induced to distribute dividends to all shareholders; otherwise, they are exposed to additional tax. 222 The accumulated earnings provision taxes corporations on undistributed earnings. 223 This can serve as a tool to minimize the conflict between minority and majority shareholders. Since agents are value maximizers and are part of their corporation, they are induced to reduce the corporation's tax burden. And since eventually corporate tax is borne by individuals (though, not necessarily shareholders), in a highly concentrated corporation a tax imposed on corporations has a larger effect on shareholders than in a corporation with dispersed ownership. As long as the majority shareholders' holdings in the corporation are substantial, they are motivated to escape this extra taxation levied on their corporation. 224 Thus, tax law and corporate law go hand in hand since agents have incentives to reduce their tax burden.

Many introductory and foundational texts in the political and administrative sciences present taxation and regulation as distinct instruments of governance (e.g., Lowi 1972; Hood 1986; Knill & Tosun 2012). Regulation is understood as rules proscribing certain behaviors and sanctioning others. It is justified in terms of protecting the public interest and usually takes the form of laws, but may also include standards, principles and norms (cf. Levi-Faur 2011: pp. 4–6). In contrast, taxation works through the medium of money and shapes individual behavior through material incentives that leave actors leeway to act according to their individual cost–benefit calculations. While this distinction certainly makes sense, it collapses if one steps back to take a broader perspective. First, like regulation, taxation is based on laws, standards, principles, and norms. Tax law is backed by sanctions threats and (ultimately) state coercion. It is legitimized by reference to the public interest. Second, while the primary objective of taxes – with the important exception of environmental and sin or health taxes – may be to raise revenues, they discourage the taxed activity and thus shape individuals' or firms' behavior, that is, they have regulatory impacts (Barnett & Yandle 2004). Likewise, while the primary purpose of regulation is to proscribe certain behaviors, they can be understood as implicit taxes (Posner 1971). “From the standpoint of the affected individual or firm, all regulations are taxes and all taxes regulate” (Barnett & Yandle 2004, p. 217). Another reason why regulation and taxation are often seen as distinct is that regulation is conceived as a dynamic process, in which regulators and regulated are engaged in a continuous, personal interchange, whereas taxation is seen as a “static, stultified, coercive, and impersonal exchange” that consists merely in handing over money (Braithwaite 2007, p. 3). As Braithwaite and her colleagues have shown (Special issue of Law & Policy, vol. 29, issue 1, 2007), this juxtaposition has never held empirically. In contrast, tax systems at the national, regional, and global level are dynamic regulatory systems and they can and should be studied as that.

Our discussion of the double dividend provided by regulatory taxes was couched in the language of regulation theory. Politicians were described as auctioning taxes and loopholes to the highest political bidder and then having the resulting tax revenue to use in providing additional special interest benefits. Clearly, the evolved theory of regulation contains a number of positive components that may be related to taxation as regulation. To provide meaningful content to this statement, we must consider the elements that form the theory.

Public interest theory is the first element. Primarily based on a search for efficiency, the public interest theory asserts that when involved in political decisions, politicians shove aside their personal interests and are motivated primarily by a desire to maximize social welfare. Regulatory taxes will be used to correct market imperfections that result from monopoly power, incomplete information, the absence of property rights, or the inability of people to transact. Of course, designing efficient regulatory taxes requires detailed information about the demand and supply of the commodity or activity to be regulated. More often than not, special interest groups are pleased, if not anxious, to deliver the information to the politician. In the process, the human tendencies of politicians can override their primary public interest motivations. Capture theory steps in when public interest theory breaks down. This theory indicates that publicly interested politicians unwittingly are captured by the interests they serve. In effect, the regulated become the regulators.

We’ve already seen that ex post instruments have some unique costs, so I’ll just add here that abandoning the tax system in favor of “command and control” regulation also may be costly. Proponents of price instruments point out that Pigouvian taxes are superior to regulation in that they generate resources that can be used for other socially useful projects, such as lowering the income tax.177 I’ve argued that claim isn’t inevitably true, but it is accurate at least in the case of traditional regulation (as opposed to “nudges”), and where the government’s alternative is to use sticks and set aside that money for public, rather than private, use.178 In other words, if we follow Fleischer’s suggestion, we may get more accuracy, but at the cost of the revenue benefits we might have gained from a tax. If, however, government’s alternative was to use a subsidy or “carrot,” then Fleischer’s proposal is more appealing in comparison, since regulation saves the government on the cost of paying out rewards. 179

On the other hand, it is also possible that Fleischer intends to argue not against all Pigouvian taxes, but rather only against those that are part of the traditional tax system. For example, some industries must pay licenses in order to operate. Often these licenses vary depending on the location and intensity of the industrial operation.180 From an economic perspective (and sometimes a legal one), licenses work very similarly to “taxes.”181 The difference would be that they are administered by a regulatory agency, rather than the tax collector. This may seem a minor difference, but a number of scholars point to differences in expertise and institutional norms in the two bureaucracies, differences that are not coincidental but instead are the structural result of the underlying goals and functioning of each.182

The ex ante / ex post dilemma arises for government encouragement of positive externalities, too. Over the past thirty years or so, questions of how best to design systems for encouraging innovation and the arts have risen to become perhaps the most important debates in intellectual property.223 The core of the debate is whether prizes---basically, grants awarded for achieving particular outcomes---should supplement or even replace our existing patent regime.224

For a time, commentators assumed that prizes had to be offered ex ante, while patents are essentially an ex post device whose value is determined by the behavior of consumers after the invention is completed.225 In that context, a key point of contention was whether the informational benefits of waiting outweighed the lower social cost of prizes.226

A regulatory agency’s arsenal often contains multiple weapons. Occasionally, however, an agency has the power to completely obliterate its regulatory targets or to make major waves in society by using a “regulatory nuke.” A regulatory nuke is a tool with two primary characteristics. First, it packs power sufficient to profoundly impact individual regulatory targets or significantly affect important aspects of society or the economy. Second, from the perspective of the regulatory agency, it is politically unavailable in all but the most extreme situations. They are found in many corners of the federal bureaucracy. This Article illustrates that even when individual regulatory nukes get our attention, we often think about these weapons in unproductive ways. Typically, regulatory nukes are approached in a bipolar way. On the one hand, they may be seen as regulatory anomalies with little relevance to most regulated entities. On the other hand, particularly if an agency has launched its regulatory nuke, the launch becomes part of agency lore and the story is of the destruction left in its wake.

Drawing on the Nobel Prize–winning game theory developed by Thomas Schelling, this Article moves beyond the dud/mushroom cloud dichotomy and recasts the regulatory nuke as an important factor that influences the calculus of regulation. This analysis suggests that agencies often get mileage out of regulatory nukes by pointing their weapons rather than firing them: the power of the tool is often leverage in regulatory diplomacy—for threats, posturing, and coercion. Although this Article is based on game theory, it also provides a wealth of examples that work to illustrate the real-world importance of the theory to many aspects of the administrative state. ...