By Bob Needham
Michigan Law
In the 24 years that Professor Reuven Avi-Yonah has been teaching tax law, he has seen a substantial uptick in interest: When he first started, fewer than half the JD students took a tax law class, but now roughly two-thirds do.
“I think everybody should take at least one tax class, in part because it doesn’t just affect your professional life—taxes affect your personal life, too. It is helpful to know something about this stuff,” he said.
Avi-Yonah—the Irwin I. Cohn Professor of Law and director of the International Tax LLM Program—regularly shares his tax expertise outside the classroom as well. He has served as a consultant to the U.S. Department of the
Treasury and the Organisation for Economic Co-operation and Development (OECD), and in August 2023, he published his latest work, Research Handbook on Corporate Taxation (Edward Elgar Publishing). Most recently, he began writing a regular weekly column for Tax Notes, the leading journal in the field.
In his new role as a columnist, Avi-Yonah has found no shortage of issues to write about. He recently answered five questions about some of the more pressing issues in tax law:
1. Several of your columns for Tax Notes have concerned Moore v. United States, which is currently pending before the Supreme Court. How important is that case, and what is at stake?
This has been the biggest tax law news of the last year—and arguably of the last century. Since 1920, the U.S. Supreme Court has never invalidated the tax statute on constitutional grounds. Yet suddenly last year there was this case that has been percolating in the courts for several years, about whether the government can impose an income tax without “realization”—the sale of an asset.
The trigger for this was legislation in the Senate, with support from the White House, that would tax billionaires on the unrealized increase in the value of their property.
This doesn’t mean that everybody would have to pay tax on the increase in the value of their homes. It is really only for rich people, and it only applies to things that are publicly traded, like stock. This would be the best change to the tax code that we could make. It would get rid of a lot of the problems with the income tax, such as eliminating the need for a lower capital gains tax rate.
The argument against this is that it is unconstitutional because these increases are not income, and opponents rely on a 1920 case to make that argument. If the Supreme Court so holds, this would have immense implications. There are very large areas in the tax code that do not involve a sale or exchange of an asset and that nevertheless impose tax. The estimated potential hit to federal revenue is in the trillions of dollars.
Since the oral arguments in December, most people do not think that the Court will go that far. Some people think the Court didn’t realize all the potential collateral damage when they granted certiorari. The result of Moore is likely to be a very narrow ruling for the government.
2. One of your columns said that even if Moore doesn’t upend the tax code, other challenges will come along that will be more likely to do so. Why is that?
This is where it gets interesting. We uniquely tax American citizens even if they live permanently overseas. The only way to escape taxation is to go to the American consulate and sign forms that give up your citizenship. About 3,000 people do that every year, and this triggers an “exit tax” that acts as if they had sold all of their assets. Many people do this because they avoid both the income tax and the estate tax.
This is exactly the kind of tax that is ripe for a constitutional challenge because the tax is imposed directly on the individual affected. This might be the next challenge, due to the same interests that brought Moore. Like most of these cases, the Moore case is not about Mr. Moore—it is about a bunch of conservative think tanks, all of whom filed amicus briefs in favor of the taxpayer to get this case to the Supreme Court. That is how many Supreme Court cases happen these days.
3. In November, the IRS announced what it called “a sweeping effort to restore fairness to the U.S. tax system.” Do you think such an effort is necessary, and will this current effort accomplish its goal?
It is definitely necessary. This is not about changing the law; this is about enforcing existing law, and there is a lot of evidence that existing tax law is not adequately enforced. This is called the tax gap, the gap between what is supposed to be paid and what is actually paid. The basic problem is that there are lots of kinds of income that are neither subject to withholding nor to “information reporting,” such as a form 1099 that goes to the IRS: small-business income, “gig” work income, foreign income.
They’ve already collected something like half a billion dollars in taxes from simply pursuing the lowest-hanging fruit—situations where the income was declared on the tax return but the tax was not paid. But that’s really a drop in the bucket. The estimate was that they might be able to collect something like $240 billion, and they haven’t really made much progress yet, although I hope that they will.
One area that has seen significant progress is the issue of hiding money overseas. A law passed in 2010 requires foreign banks to let the IRS know if U.S. citizens or residents have accounts there or have investments through them. That has been quite effective. It is showing up in quite a few court cases now in which penalties are imposed. These cases show that the IRS is getting the requisite information. So I’m a little hopeful that at least in this area, things will get better.
4. In the U.S., we are in the middle of “tax season,” when we typically hear some people call for grand schemes to simplify the tax system. Are these reasonable ideas?
Yes, but I think a lot of progress has actually been made on simplifying the system. Most people file a form called the 1040EZ, which is very simple if all that you have is wage income and you take the standard deduction. Over 90 percent of taxpayers don’t itemize deductions anymore.
One interesting thing about this is that the IRS already has all the information they need: They have your income and they have the standard deduction, so they can actually calculate how much tax you owe and send you a refund. And there’s now a pilot where you can do a free filing of a tax return through an IRS website, which for most people is perfectly adequate.
There is a lot more that can be done, mostly for people who have more complicated tax situations—the top 10 percent, let’s say, of the taxpaying population. The suggestion has been made that there is no reason, really, to have a tax return industry. Of course, TurboTax, H&R Block, and so on have been lobbying very fiercely against that. The problem is there is almost no lobby for simplification. Tax lawyers make their living off the fact that the tax code is complicated. It’s really only tax professors who argue for simplification.
5. We’ve been focusing on the U.S. system, but a lot of your work is on international taxation. What is the biggest issue in international taxation right now that people might not know about?
I have been advocating for years that the biggest issue in international taxation is to prevent what’s called zero taxation or double non-taxation. It is to prevent income that crosses borders from simply not being taxed by any country.
In the last decade, there has been an international tax revolution led primarily by the OECD, which set up a two-pillar mechanism for reforming international tax. One is aimed directly at preventing double non-taxation. The other one is about shifting some element of income of multinational corporations to the country where their products are sold. In October 2021, there was an agreement in principle on these pillars by more than 140 countries.
I am very supportive of both of these efforts; they are reflected in my writing from as long as 30 years ago.
Michigan Law
In the 24 years that Professor Reuven Avi-Yonah has been teaching tax law, he has seen a substantial uptick in interest: When he first started, fewer than half the JD students took a tax law class, but now roughly two-thirds do.
“I think everybody should take at least one tax class, in part because it doesn’t just affect your professional life—taxes affect your personal life, too. It is helpful to know something about this stuff,” he said.
Avi-Yonah—the Irwin I. Cohn Professor of Law and director of the International Tax LLM Program—regularly shares his tax expertise outside the classroom as well. He has served as a consultant to the U.S. Department of the
Treasury and the Organisation for Economic Co-operation and Development (OECD), and in August 2023, he published his latest work, Research Handbook on Corporate Taxation (Edward Elgar Publishing). Most recently, he began writing a regular weekly column for Tax Notes, the leading journal in the field.
In his new role as a columnist, Avi-Yonah has found no shortage of issues to write about. He recently answered five questions about some of the more pressing issues in tax law:
1. Several of your columns for Tax Notes have concerned Moore v. United States, which is currently pending before the Supreme Court. How important is that case, and what is at stake?
This has been the biggest tax law news of the last year—and arguably of the last century. Since 1920, the U.S. Supreme Court has never invalidated the tax statute on constitutional grounds. Yet suddenly last year there was this case that has been percolating in the courts for several years, about whether the government can impose an income tax without “realization”—the sale of an asset.
The trigger for this was legislation in the Senate, with support from the White House, that would tax billionaires on the unrealized increase in the value of their property.
This doesn’t mean that everybody would have to pay tax on the increase in the value of their homes. It is really only for rich people, and it only applies to things that are publicly traded, like stock. This would be the best change to the tax code that we could make. It would get rid of a lot of the problems with the income tax, such as eliminating the need for a lower capital gains tax rate.
The argument against this is that it is unconstitutional because these increases are not income, and opponents rely on a 1920 case to make that argument. If the Supreme Court so holds, this would have immense implications. There are very large areas in the tax code that do not involve a sale or exchange of an asset and that nevertheless impose tax. The estimated potential hit to federal revenue is in the trillions of dollars.
Since the oral arguments in December, most people do not think that the Court will go that far. Some people think the Court didn’t realize all the potential collateral damage when they granted certiorari. The result of Moore is likely to be a very narrow ruling for the government.
2. One of your columns said that even if Moore doesn’t upend the tax code, other challenges will come along that will be more likely to do so. Why is that?
This is where it gets interesting. We uniquely tax American citizens even if they live permanently overseas. The only way to escape taxation is to go to the American consulate and sign forms that give up your citizenship. About 3,000 people do that every year, and this triggers an “exit tax” that acts as if they had sold all of their assets. Many people do this because they avoid both the income tax and the estate tax.
This is exactly the kind of tax that is ripe for a constitutional challenge because the tax is imposed directly on the individual affected. This might be the next challenge, due to the same interests that brought Moore. Like most of these cases, the Moore case is not about Mr. Moore—it is about a bunch of conservative think tanks, all of whom filed amicus briefs in favor of the taxpayer to get this case to the Supreme Court. That is how many Supreme Court cases happen these days.
3. In November, the IRS announced what it called “a sweeping effort to restore fairness to the U.S. tax system.” Do you think such an effort is necessary, and will this current effort accomplish its goal?
It is definitely necessary. This is not about changing the law; this is about enforcing existing law, and there is a lot of evidence that existing tax law is not adequately enforced. This is called the tax gap, the gap between what is supposed to be paid and what is actually paid. The basic problem is that there are lots of kinds of income that are neither subject to withholding nor to “information reporting,” such as a form 1099 that goes to the IRS: small-business income, “gig” work income, foreign income.
They’ve already collected something like half a billion dollars in taxes from simply pursuing the lowest-hanging fruit—situations where the income was declared on the tax return but the tax was not paid. But that’s really a drop in the bucket. The estimate was that they might be able to collect something like $240 billion, and they haven’t really made much progress yet, although I hope that they will.
One area that has seen significant progress is the issue of hiding money overseas. A law passed in 2010 requires foreign banks to let the IRS know if U.S. citizens or residents have accounts there or have investments through them. That has been quite effective. It is showing up in quite a few court cases now in which penalties are imposed. These cases show that the IRS is getting the requisite information. So I’m a little hopeful that at least in this area, things will get better.
4. In the U.S., we are in the middle of “tax season,” when we typically hear some people call for grand schemes to simplify the tax system. Are these reasonable ideas?
Yes, but I think a lot of progress has actually been made on simplifying the system. Most people file a form called the 1040EZ, which is very simple if all that you have is wage income and you take the standard deduction. Over 90 percent of taxpayers don’t itemize deductions anymore.
One interesting thing about this is that the IRS already has all the information they need: They have your income and they have the standard deduction, so they can actually calculate how much tax you owe and send you a refund. And there’s now a pilot where you can do a free filing of a tax return through an IRS website, which for most people is perfectly adequate.
There is a lot more that can be done, mostly for people who have more complicated tax situations—the top 10 percent, let’s say, of the taxpaying population. The suggestion has been made that there is no reason, really, to have a tax return industry. Of course, TurboTax, H&R Block, and so on have been lobbying very fiercely against that. The problem is there is almost no lobby for simplification. Tax lawyers make their living off the fact that the tax code is complicated. It’s really only tax professors who argue for simplification.
5. We’ve been focusing on the U.S. system, but a lot of your work is on international taxation. What is the biggest issue in international taxation right now that people might not know about?
I have been advocating for years that the biggest issue in international taxation is to prevent what’s called zero taxation or double non-taxation. It is to prevent income that crosses borders from simply not being taxed by any country.
In the last decade, there has been an international tax revolution led primarily by the OECD, which set up a two-pillar mechanism for reforming international tax. One is aimed directly at preventing double non-taxation. The other one is about shifting some element of income of multinational corporations to the country where their products are sold. In October 2021, there was an agreement in principle on these pillars by more than 140 countries.
I am very supportive of both of these efforts; they are reflected in my writing from as long as 30 years ago.
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