The James Hausman Tax Law & Policy Workshop
presents
Tom Brennan
Harvard Law School
Distributed Deferral
Wednesday, January 9, 2019
12:30 - 2:00
Solarium (room FA2), Falconer Hall
84 Queen's Park
We show that a current tax on income is equivalent to a future tax levied on both the original income and the investment returns it earns, provided that the tax rate is constant and that neither the taxpayer nor the government is subject to certain investment or borrowing constraints. We then show that instead of deferring a tax to a single future point in time, the tax may be broken into components that are distributed periodically over time. There is not a unique method for distributing deferral, but we introduce examples of particular methods, including a “non-increasing” deferral method that taxes returns to the original income periodically but does not tax the original amount itself until it is no longer invested. Under idealized assumptions, the deferral method used is irrelevant, but in practice the assumptions may be violated and particular choices can lead to different sorts of risks and planning opportunities. The distributed deferral framework offers a set of tools that can spread the risk of tax rate changes over time, allowing a type of income tax averaging and reducing the ability of taxpayers to benefit from occasional low tax rate environments or tax holidays. In addition, distributed deferral can reduce the ease with which budgetary rules like the Congressional budget window may be manipulated.
***Note from Tom Brennan to attendees at the University of Toronto James Hausman Tax Law and Policy Workshop: This is an early draft paper. All the major ideas are contained herein, but several sections will be rewritten and more developed in the final version. Because this is a work in progress, we are particularly grateful for any thoughts and comments about the work, and our final paper will benefit grateful from them. Thank you in advance for reading, and I very much look forward to talking with you at the workshop.
Thomas J. Brennan is the Stanley S. Surrey Professor of Law at Harvard Law School. His research focuses on applying finance and economics to analyze and inform tax policy, and on using empirical methods to investigate the effects of tax laws and the strategic behavior of taxpayers. He also studies how finance and economics can inform other areas of the law, such as regulations designed to limit risk.
Professor Brennan received an AB in mathematics from Princeton University, an AM in mathematics from Harvard University, a PhD in mathematics from Harvard University, and a JD from Harvard Law School. He is admitted to the bar of the State of New York and practiced as a corporate tax attorney with Cravath, Swaine & Moore, LLP. He also worked as a strategist for the Capital Markets Strategies group at Goldman, Sachs & Co.
His prior academic appointments include Justin W. D'Atri Visiting Professor of Law, Business and Society at Columbia Law School, Professor of Law at Northwestern University School of Law, and Visiting Scholar at the Sloan School at MIT, where he was part of the Laboratory for Financial Engineering.
For additional workshop information, please contact Events at events.law@utoronto.ca
