TaxLawLecture2and3

TaxLawLecture2and3 - 1 Introduction to Tax Law and Policy:...

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Unformatted text preview: 1 Introduction to Tax Law and Policy: Outline Income Tax and the Concept of Income Haig-Simons Definition; Tax Base; Tax Enforcement; Fringe Benefits; Illegal Income; Imputed Income Glenshaw Glass Capital Gains and the Realization Doctrine Eisner v. Macomber Tax Avoidance and Tax Shelters Knetsch 2 Glenshaw Glass Background: antitrust laws allow punitive (or exemplary) damages in private antitrust actions e.g. Firm A suffers $1 million of lost profits as a result of price-fixing by Firm B Suppose Pr[winning] = 0.2 if A sues Will A sue if litigation costs = 0? Will A sue if doing so costs $400,000 in legal fees? 3 Glenshaw Glass What if the court awards $3 million to A (of which $2 million are exemplary damages)? So, punitive damages encourage private antitrust lawsuits What if A has to pay 35% tax on the award? Can the antitrust authorities restore the incentive to sue? 4 Glenshaw Glass What was the courts decision (holding) in Glenshaw ? Punitive damages constitute taxable income Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients 5 Haig-Simons Definition Income = Consumption + Net Increase in Wealth Punitive damages are characterized by Chief Justice Warren as . . . undeniable accessions to wealth . . . 6 Haig-Simons Definition Income = Consumption + Net Increase in Wealth Punitive damages are characterized by Chief Justice Warren as . . . undeniable accessions to wealth . . . Illustrates broad scope of the H-S defn 7 Windfalls Are punitive damages analogous to windfalls? Are windfalls income? Suppose you earn $100,000 salary in 2007 and also win $5000 in a lottery How much did you earn in 2007? What was your income in 2007? 8 Windfalls Suppose you buy an old piano at an auction for $15 and find $4467 in cash hidden inside Should this windfall be taxable? Cesarini : Yes What are the incentive effects of taxing windfalls? If there are no incentive effects, why not tax windfalls at 100%? 9 Recovery for Personal Injuries Although damage awards are typically included in taxable income, there is an exception in current US tax law for damages arising out of personal injuries Can you reconcile this with Glenshaw ? 10 Recovery for Personal Injuries Suppose you suffer an accident and receive damages for lost wages and pain/suffering Is your power to consume unaffected: relative to the someone who did not suffer the accident?...
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TaxLawLecture2and3 - 1 Introduction to Tax Law and Policy:...

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