Tax Issues Legal Resource Materials
Entrepreneurship Law Editorial Team
Robert Carroll et al., Entrepreneurs, Income Taxes, and Investment, in Does Atlas Shrug? The Economic Consequences of Taxing the Rich (Joel Slemrod ed., 2000).
Abstract (from Amazon Product Description):
Since the introduction of the income tax in 1913, controversy has raged about how heavily to tax the rich. Opponents of high tax rates claim that heavy assessments have negative incentives on the productivity of some of our most talented citizens; supporters stress the importance of the rich shouldering their "fair share," and decry the loopholes that permit many to escape their obligations. Notably absent from this debate is hard evidence about the actual impact of taxes on the behavior of the affluent. This book presents evidence by leading economists of the effects of taxes on the formation of businesses, the supply of labor, the form of executive compensation, the accumulation of wealth, the allocation of portfolios, and the realization of capital gains. Among its findings are that the labor supply of the rich remained unchanged in the face of large tax cuts in 1986, and that in late 1992 executives exercised billions of dollars' worth of stock options in order to beat the tax increases expected in 1993. The book also presents a history of efforts to tax the rich, a demographic snapshot of the financially affluent, and a road map to widely used tax-avoidance strategies. Does Atlas Shrug? will be of great interest to policymakers and interested citizens who want to know how much tax revenue could really be gained by increasing tax rates on the rich, or whether low capital gains tax rates really spur economic growth.
William P. Streng, Tax Simplification for Small Business: Proprietorships, Partnerships, and Corporations - A Survey of Problem Areas, in Federal Income Tax Simplification (Charles H. Gustafson ed., 1979).
Abstract (from WORLDCAT): A joint project of the American Law Institute, the Section of Taxation of the American Bar Association, and the American Law Institute-American Bar Association Committee on Continuing Professional Education."/ Official record of the Conference on Federal Income Tax Simplification held Jan. 4-7, 1978, in Warrenton, Va.
Marnix Amand, Wealth Taxation and Entrepreneurship (2012), available at http://ssrn.com/abstract=2172756.
Abstract (by author): This paper studies wealth taxation in a heterogeneous agent economy with entrepreneurship. Entrepreneurs face borrowing constraints and stochastically receive the opportunity to sell their firm to outside investors. With the help of a novel panel dataset on household wealth, the author shows that this possibility for entrepreneurs to sell their firm is crucial to simultaneously account for both the stylized facts of the wealth distribution and year-to-year changes in wealth. In a subsequent policy experiment, the author shows that the effects of a wealth tax depend on how frequently entrepreneurs receive the opportunity to sell their firm. In an economy where this probability is low, taxing wealth reduces output by affecting the capacity of entrepreneurs to invest in their firm. In an economy where entrepreneurs can easily sell their firm, taxing their wealth has little aggregate effect. The policy implication is that improving financial markets reduces the output losses due to a wealth tax.
Julie Bennett, What’s In It for Me? Getting the Most Out of the Small Business Jobs Act of 2010, Entrepreneur, Dec. 2010 at 104.
The article discusses governmental programs that are part of the U.S. Small Business Jobs Act of 2010. Loan opportunities and tax cuts that are incorporated within the law are designed to assist entrepreneurs and grow the U.S. economy. The law increases the limits of loan guarantees given by the U.S. Small Business Administration, and tax deductions given to companies that expand their businesses.
Terrence J. Benshoof, The Tax Relief Act of 2010: How the Act Affects Small Businesses, 23 DCBA Brief 16 (2011).
The Tax Relief Act of 2010 affected most taxpayers by extending the Economic Growth and Tax Relief Reconciliation Act of 2001tax rate brackets and a number of individual deductions, as well as extending favorable dividend and capital gain rates for an additional two years. These items of relief are essentially personal in nature, affecting small business owners and employees alike. Similarly, the effects of the Tax Relief Act of 2010 with respect to estate and gift taxes apply to all types of individual taxpayers. This article examines the effect that the Tax Relief Act of 2010 will have on those taxpayers who own and operate small, non-publicly traded businesses, with a view towards planning for effective minimization of taxes, along with asset protection.
Robert Carroll, Douglas Holtz-Eakin, Mark Rider & Harvey S. Rosen, Income Taxes And Entrepreneurs' Use Of Labor, 18(2) J. Lab. Econ. 324 (2000).
Abstract (from authors):
This paper investigates the effect of entrepreneurs' personal income tax situations on their capital investment decisions. We examine the income tax returns of a sample of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates for the relatively affluent associated with that law affected their decisions to invest in physical capital. We find that individual income taxes exert a statistically and quantitatively significant influence on investment decisions. In our sample increase in marginal tax rates would reduce the proportion of entrepreneurs who make new capital investments by 10.4 percent, and decrease mean investment expenditures by 9.9 percent.
Jaclyn Cherry, Charitable Organizations and Commercial Activity: A New Era Will the Social Entrepreneurship Movement Force Change? 5 J. Bus. Entrepren. & L. 345 (2012).
Abstract (by author): It is no longer a new trend for charitable organizations to become involved in commercial activities. Thousands of nonprofit organizations have embraced the social entrepreneurial concept and have either created “commercial” type ventures as part of their nonprofits, have created spin-off organizations or subsidiary organizations, or have moved into the new area of hybrid organizations. Because there are no clear rules or guidelines for dealing with this issue, the third sector finds itself with rogue components and a spin-off group of hybrid organizations being loosely termed “social entrepreneurs.” Though these groups have grown in numbers in recent years, they have faced their own trials and tribulations, and success has been mixed. The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine”, the test being used by courts to interpret the operational test of IRC § 501(c)(3), which has pushed many an organization into these murky waters. It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine”; and 3) it will discuss the unrelated business income tax and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order. Finally, this article concludes by suggesting that changes within the system are overdue and proposes a three-part analysis to be used going forward.
Roger M. Groves, New Age Athletes as Social Entrepreneurs: Proposing a Philanthropic Paradigm Shift and Creative Use of Limited Liability Company Joint Ventures, 11 Wake Forest J. Bus. & Intell. Prop. L. 213 (2011).
This article examines how former professional basketball players have been able to fund philanthropic projects in their communities. Through the use of different business organizations and tax strategies, they have been able to maximize the return on their brand of social entrepreneurship.
Asa Hansson, Tax Policy and Entrepreneurship: Empirical Evidence from Sweden, 38 Small Bus. Econ. 495 (2012).
This paper examines the relationship between income taxes and the decision to become self-employed using data from Sweden. By making it possible to track a large number of individuals over extended time periods and across a number of tax rate changes while controlling for important additional determinants, available tax-return information from Sweden allows for statistical estimation of the influence that income taxes have on the probability of becoming self-employed. The changing tax rate structure combined with the fact that the Swedish tax system does not provide additional tax benefits to small-business entrepreneurs compared with those who work as employees provides a powerful setting through which to examine the tax rate structure's influence on individuals' choice to become self-employed. Contrary to many earlier studies based on US data, this paper finds that both average and marginal taxes have a negative impact on the decision to become self-employed.
Andreas Hayfler, Pehr-Johan Norbäck & Lars Persson, Entrepreneurial Innovations and Taxation (CEPR, Discussion Paper No. DP9157, 2012), available at http://ssrn.com/abstract=2155527.
Abstract (by authors): Stimulating entrepreneurship is high on the policy agenda of many countries. The authors study the effects of tax policies on entrepreneurs’ choice of riskiness (quality) of an innovation project, and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs innovating for entry to choose projects with inefficiently little risk, whereas this imperfection does not arise when innovating for sale. Tax systems which systematically favor market entry of entrepreneurs can thus lead to welfare losses due to inefficient quality choices, despite leading to more competition in the product market.
Lloyd Hitoshi Mayer & Joseph R. Ganahl, Taxing Social Enterprise (Notre Dame Legal Studies Paper, No. 1311, 2013), available at http://ssrn.com/abstract=2256539.
Abstract (by authors): The fairly strict divide in the United States between for-profit and nonprofit forms presents a quandary for many entrepreneurs who want to combine doing good with doing well. On the one hand, for-profits offer great flexibility and access to capital and so attract entrepreneurs who would like to take advantage of the ability of for-profits to scale up rapidly to meet growing demand. At the same time, however, for-profit forms also limit entrepreneurs’ ability to engage in philanthropy, due to the fiduciary duties managers owe to the equity holders. On the other hand, nonprofits offer their founders the freedom to prioritize public benefit but limit both their access to capital, in large part due to the bar on equity financing for a nonprofit, and their flexibility in addressing changing societal needs as a result of constraints in the law designed to deter nonprofits from straying into activities unrelated to their narrow primary mission. Hybrids — low-profit limited liability companies, benefit corporations, and other related forms — have been touted as the “both-and” solution to this problem by marrying the capital and innovation that results from the ability to generate a profit for investors with the public benefit goals that characterize most nonprofits. Since the first hybrid enabling law was passed in Vermont in 2008, the number of states offering hybrid forms has grown steadily, as has the number of entrepreneurs choosing statutory hybrids as a middle road between the for-profit and the nonprofit. Plaudits for and criticism of the hybrid form have also proliferated. Proponents have lauded their ability to facilitate socially conscious enterprise. Detractors have questioned the viability of the hybrid form and have suggested that they create more fiduciary conflicts than they resolve. To date, however, there has been no serious scholarly publication addressing the appropriate tax treatment of hybrid entities even though some supporters of hybrids have asserted that these forms deserve beneficial tax treatment. In this Article, we intend to close that gap by thoroughly examining the arguments for tax preference and the likely consequences that would flow from offering such preference. We accept the fact that hybrid forms have gained a firm foothold in the legal landscape and expect that they will increase in prominence and influence. We contend, however, that offering nonprofit-like tax benefits to hybrid entities will likely have a deleterious effect, not only on the charitable sector and the public fisc, but possibly even on hybrids themselves. The Article concludes with some proposals for possible modifications to existing tax laws that would acknowledge hybrids’ virtues while not exacerbating their potential weaknesses.
Douglas Holtz-Eakin, Should Small Business Be Tax-Favored?, 48 Nat'l Tax J. 387 (1995).
Douglas Holtz-Eakin, John W. R. Phillips & Harvey S. Rosen, Estate Taxes, Life Insurance, And Small Business, 83(1) Rev. Econ. & Stat. 52 (2001).
Abstract (from authors):
One criticism of the estate tax is that it prevents the owners of family businesses from passing their enterprises to their children. The problem is that it may be difficult to pay estate taxes without liquidating the business. A natural question is why individuals with such concerns do not purchase enough life insurance to meet their estate tax liabilities. This paper examines whether and how people use life insurance to deal with the estate tax. We find that, other things being the same, business owners purchase more life insurance than other individuals. However, on the margin, their insurance purchases are less responsive to estate tax considerations and they are less likely to have the wherewithal to meet estate tax liabilities out of liquid assets plus insurance.
Leandra Lederman, The Entrepreneurship Effect: An Accidental Externality in the Federal Income Tax, 65 Ohio St. L.J. 1401 (2004).
Abstract: Case law and commentators often speak as if all income-producing activities are taxed similarly. However, that simply is not true for individuals. Although the expenses and losses of business activities generally are deductible from income of any source and net losses can be carried to other tax years, individuals' investment expenses and losses generally are deductible only from investment income. Although many of the provisions restricting investment-related deductions were enacted at different times, and each one has its own rationale, the combined effect of these provisions on individual investors is a systematic preference for business losses over investment losses.
Michael Livingston, Risky Business: Economics, Culture and the Taxation of High-Risk Activities, 48 Tax L. Rev. 163 (1993).
Abstract (from author):
This Article explores the concept of risk incentives under the federal income tax. The thesis of the Article is that risk incentives are difficult to defend economically, except perhaps under limited circumstances and then only when making the most favorable assumptions. Such incentives are better understood as a cultural phenomenon: an expression of approval for risk takers in a society that celebrates risk. The celebration of risk colors the interpretation of economic evidence and provides an independent argument for risk incentives. Yet, from a cultural perspective as well, the existing incentives are flawed, encouraging many less desirable types of risk and ignoring others more worthy of encouragement.
Anthony J. Luppino, A Little of This, a Little of That: Potential Effects on Entrepreneurship of the McCain and Obama Tax Proposals, 31 W. New Eng. L. Rev. 717 (2009).
Abstract (from author): For purposes of this commentary, I will for the most part try to use a broad definition of entrepreneurship and explore potential effects of significant tax proposals announced by Senators John McCain and Barack Obama on innovation and creativity in entrepreneurial endeavors of any size. Part I will demonstrate that both candidates are conscious of the need to speak to entrepreneurship and small business in their campaigns. Part II will address the overall tax climate that might occur if the most major components of the candidates' respective tax plans became law. Part III will discuss specific provisions with more direct, and in some cases expressly targeted, connections to entrepreneurship and innovation. Throughout Parts II and III, the focus will be primarily on the tax proposals made by the two candidates in their campaigns prior to the public awareness of the economic crisis that ensued when the financial predicaments of Lehman Brothers, Merrill Lynch, and AIG became front page news in mid-September 2008, as I think those proposals are illustrative of the candidates' views of what tax policy ought to be in some key areas. I will, however, note in the course of such discussion below some potential modifications or supplements to their respective tax plans that appeared in statements made between mid-September and the October 17, 2008, conference for which this Article was written. Finally, Part IV will offer a few suggestions on tax policy issues not featured in the public pronouncements by the candidates that might nevertheless be productive areas for the next presidential administration and Congress to consider.
Oleksandr Pastukhov, Will Internet Businesses Ever Become Interested in Complying with Tax Laws?, 22(8) Intell. Prop. & Tech. L. J. 10 (2010).
Abstract (from author): The Article discusses the debate on the multi-jurisdictional taxation of electronic commerce in the U.S. It states that due to country's credit crunch that turns into global financial crisis, states might try and tap into Internet sales before 2014, when the current extension of the moratorium expires, to close gaps in their budgets. The author believes that tax compliance online can become mainstream behavior, a willful act of taxpayers to preserve law and order in the on and offline worlds.
Michelle Scholastica Paul, Bridging the Gap to the Microfinance Promise: A Proposal for a Tax-Exempt Microfinance Hybrid Entity, 42 N.Y.U. J. Int'l L. & Pol. 1383 (2010).
Abstract (from author): Prior to the emergence of Microfinance Institutions (MFIs), poor borrowers seeking credit without collateral were limited to local moneylenders, who typically charged high interest rates in excess of 100 percent. MFIs now compete with moneylenders, but unfortunately many MFIs also charge very high interest rates. It remains unclear how best to aid MFIs in lowering their rates. MFIs charge higher interest rates than commercial banks because they face higher operating costs. MFI operating costs are comparatively higher than commercial banks because the provision of numerous small loans exposes lenders to greater risk due to lack of information about borrowers, lack of collateral to secure loans, and defaults. Further, MFI operating costs are also pushed upwards due to high administrative costs and the high costs of obtaining capital. Most MFIs are limited in their ability to attract sufficient capital because they are formed as nonprofit entities, which generally are statutorily barred from access to equity capital due to the non-distribution constraint.
Lars Persson et al., Entrepreneurial Innovations and Taxation (Research Institute of Industrial Economics, IFN, Working Paper No. 896, 2012), available at http://ssrn.com/abstract=2048215.
(adapted from authors):
Many governments promote small businesses for the dual reasons of fostering ‘breakthrough’ innovations and employment growth. In this paper the authors study the effects of tax and subsidy policies on entrepreneurs’ choice of riskiness of an innovation project and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs to choose projects with too little risk and this problem arises primarily when entrepreneurs market their product themselves. When innovations reduce only the fixed costs of production this leads to a fundamental policy trade-off between the declared goals of promoting employment and innovation in small, entrepreneurial firms. When innovations reduce variable production costs, policies to promote small businesses may even be unambiguously harmful.
Ronald F. Wilson, Federal Tax Policy: The Political Influence of American Small Business, 37 S. Tex. L. Rev. 15 (1996).
Abstract (from author): This Article analyzes the influence that American small business has had, and continues to have, on United States federal tax policy. Recognizing that U.S. tax policy is determined by the interaction of many complex factors, the analysis considers not only economic influences, but also political and other factors. Indeed, the political concerns of tax policymakers in Washington, D.C. are often paramount and small business advocates have proven to be quite adept at exploiting these concerns for the benefit of American small business.
William M. Gentry & R. Glenn Hubbard, Entrepreneurship and Household Saving, 4 Advances in Econ. Analysis & Pol'y 1, Art. 8 (2004).
Julie Berry Cullen & Roger H. Gordon, Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S. (Nat'l Bureau Econ. Res., Working Paper No. 9015, 2002).
Entrepreneurial activity is presumed to generate important spillovers, potentially justifying tax subsidies. How does the tax law affect individual incentives? How much of an impact has it had in practice? We first show theoretically that taxes can affect the incentives to be an entrepreneur due simply to differences in tax rates on business vs. wage and salary income, due to differences in the tax treatment of losses vs. profits through a progressive rate structure and through the option to incorporate, and due to risk-sharing with the government. We then provide empirical evidence using U.S. individual tax return data that these aspects of the tax law have had large effects on actual behavior.