Academic

I greatly enjoyed Heather?s paper and found it to be an important contribution to the literature.  As is the nature of academic comments, most of what I say will be negative ? or more politely phrased, ?suggestions for improvement.?  But in truth, I think this is an excellent paper and I would strongly encourage Heather to submit the paper in the upcoming August cycle.

The body of Heather?s paper begins in Part II with an excellent discussion of the history leading up to the adoption of the check-the-box regulations and the circumstances behind their adoption.  From there, the paper proceeds in Part III to evaluate the CTB regs along a number of dimensions.  The discussion here is extremely thorough, balanced, and ultimately persuasive on its various points.  I found myself agreeing with most of Heather?s analysis and making a mental note to myself to return to this chapter whenever I have cause to think about the effectiveness of the CTB regs. 

If there is a flaw in this discussion, it is that the various points of analysis never really come together to make an overall thesis point.  Heather organizes Part III around a number of substantive issues on which she reaches different conclusions.  The advantage of this approach is that it makes it easy for someone interested in a specific issue surrounding the CTB regs to locate the relevant portions of Heather?s discussion.  The disadvantage is that the framework is not particularly memorable, and casual readers (such as law review editors) may lose interest.  If Part III could be reorganized so as to tell more of a cohesive story, I think this would ultimately improve the impact of Heather?s piece.

Part IV shifts gears to, in Heather?s words, ?analyze the CTB election, in and of itself, from a more conceptual perspective, asking why the regulations allow a choice of business tax regimes in the particular circumstances in which the choice is afforded.?  I quote this sentence in full because I found the transition between Parts III and IV to be a little awkward as was the description of Part IV in the introduction.  I quickly understood what Heather meant by ?in and of itself? once I started reading Part IV, but I was confused about how Parts III and IV differed while reading the introduction and the first paragraph of Part IV.  Considering how many readers these days do not go past an introduction unless something in the introduction convinces them to do so, Heather might want to spend a little more thought thinking about how to succinctly describe the organization of her piece and what Part IV is intending to do.  Then again, maybe I was the only one confused by her wording.  I?d suggest that Heather ask a few of her students to read the introduction to see if they can explain to her how Part IV differs from Part III based only on the introduction and transition paragraph.

The heart of Heather?s claim in Parts IV and V is, in her words, ?Thus, to justify the CTB election as a simple and efficient approach to line-drawing between business tax regimes applicable to ?virtually indistinguishable? forms of business, the existence of each separate business tax regime must be defended.?  This is a provocative argument.  But ultimately I remain unconvinced. Heather covers a lot of ground in Part IV, but the admirable breadth of her discussion sometimes makes it lacking in depth.  In contrast to Part III, I often found myself wanting more support for her sub-arguments.

Parts IV and V are concerned with whether we should be drawing a mandatory line between multiple business tax regimes, whereas Part III examined whether ? from a starting point where we already have multiple business tax regimes ? the CTB regs do a good job of separating the applicability of these regimes as opposed to alternatives.  In other words, why not abolish the corporate tax and have only pass through taxation?  Or failing that, why not allow all entity taxpayers the option of either corporate or pass through tax treatment?

        To give an example of why I feel that the discussion in Parts IV and V could benefit from greater depth, I will focus on Heather?s refutation of benefit theory justifications for the corporate tax and of having a mandatory separation between corporate and pass through tax regimes.       

Heather notes that the American Law Institute has argued that benefit theories are inappropriate.  Yet her explanation for why is limited to: ?the income tax is not a tax on ?benefits conferred?, any additional tax on such benefit conferred ?would not, in any event, measure properly the value of the benefit obtained?, ?limited liability is an efficient characteristic for firms?, and ?[a] classification rule based on limited liability would also raise difficult implementation questions.?  Moreover, query why the federal government should be entitled to extract a tax on the benefit of limited liability that is actually conferred by the state governments.?

        It is probably the case that a strong majority of scholars currently believe that the double tax on corporate earnings lacks a persuasive justification. Heather?s brief description of the ALI?s arguments cites some of the reasons for this majority opinion.  But there are also many scholars who support the double tax on corporate earnings (on benefit theory grounds and for other reasons).  Heather?s discussion neither persuasively refutes the arguments in favor of the double tax nor acknowledges the strength of these opposing arguments.

        For instance, consider an argument supporting the double tax on corporate earnings as a toll charge on access to public equity markets.  Heather asks why should we tax benefits conferred? One answer is that doing so can be a good way to raise revenue. Under a Ramsey model of optimal taxation, it may be optimal to impose higher tax burdens on transactions with low elasticities -- transactions for which imposing a tax is less likely to deter taxpayers from engaging in the transaction.  If the benefits of accessing public equity markets are significant such that a substantial tax can be imposed on the privilege of accessing public equity markets without dramatically deterring the use of this privilege, this would potentially justify a double tax on corporate earnings.

        This argument relies on a number of empirical assertions which may or may not be true.  My purpose here is not to claim that this argument satisfactorily justifies the corporate tax, but only to give an example of a potentially persuasive argument for the corporate double tax on benefit theory grounds in order to show why I feel Heather is too quick to conclude that the tax is unjustifiable.

        Heather does argue that a double tax on corporate earnings is overly broad as a toll charge on accessing public equity markets.  She notes that ?some unincorporated entities (like The Blackstone Group L.P. and Fortress Investment Group LLC) are publicly traded but are allowed to elect their tax classification.?  However, it strikes me that these examples might be viewed as exceptions that prove the general rule.  The Blackstone transaction is controversial and many feel that legislation or regulations should be adopted to shut down the ?loophole? via which Blackstone has escaped the corporate double tax.

Heather also argues that ?many incorporated entities are not publicly traded (like Koch Industries, Inc., and Mars, Incorporated) but are still denied the choice of business tax regime. . . .?  This is true, and it may be the case that the corporate tax is over-inclusive.  However, were the corporate double tax truly burdensome to these entities, we would expect them to reorganize as LLCs or as other forms that allow for pass through elections.  That these entities remain within the corporate tax treatment may suggest that there is some benefit of being in a corporate form ? besides accessing public equity markets ? that should be taxed under a Ramsey framework.

Taking a step back to look at Heather?s paper as whole, I?ll restate that I view this as an excellent article.  My suggestion is that Heather focus whatever time she has between now and the August submission times primarily on tightening up her introduction and abstract.