Professor Larry Zelenak reads voraciously and writes passionately and he joins us to discuss both. We talk about the books he’s written, the books his written about and lots more. Learn why Treasury Secretary Andrew W. Mellon believed “the fairness” of taxing wages at a lower rate than capital income was “beyond question” and why some people just might actually love Form 1040. And most importantly, learn what it takes to make an elevator pitch about the value of fiscal citizenship. Zelenak also answers a pencil question from an article by Richard Musgrave about the Investment Tax Credit (a hat tip to Professor Ajay Mehrotra at Northwestern and the Americana Bar Foundation).
Zelenak is the Pamela B. Gann Professor of Law at Duke Law and the author of Figuring Out the Tax: Congress, Treasury, and the Design of the Early Modern Income Tax (Cambridge University Press, 2018) and Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax (University of Chicago Press, 2013), countless articles and “The Great American Tax Novel”, a review of David Foster Wallace’s The Pale King. In addition to his work as a scholar, Zelenak served as a professor in residence at the Office of the Chief Counsel, Internal Revenue Service, Washington, DC.
Zelenak likes tax. A lot. He also likes writing. That enthusiasm shines through in all of his work.From finding surprising views in letters dating from the Coolidge Administration to exploring “philosophies of tax administration” in a contemporary novel, Zelenak’s eye for what matters makes him one of the most important voices in tax law. His willingness to engage not just archival resources and great works of literature but also with classic TV sitcoms guarantees that a conversation with him will go to unexpected places.
Resources
Recording 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Recording 2:
You have a beautiful tax return. The nicest one I've ever seen.
Recording 3:
Okay, folks, but remember your manners. No stampeding. Walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law.
Steven Dean:
Today's tax maven has two loves. I'll let you judge for yourselves, but he seems almost as excited about books as he is about tax law. Not surprisingly, he both reads and writes lots of books about tax. And today we're going to talk both about books he has written and that he's written about. Specifically, we'll talk about his books, Figuring Out the Tax: Congress, Treasury, and Design of the Early Modern Income Tax and Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax. And also about David Foster Wallace's The Pale King, a book that shows just how far you may have to go to get people to listen to a half hour monologue about fiscal citizenship.
Steven Dean:
I'm Steven Dean, the Faculty Director of the Graduate Tax Program at NYU Law. And I'm here today with Larry Zelenak, the Pamela B. Gann Professor of Law at Duke. So I'm going to ask you a couple of questions and, of course, ending with the pencil question. But we're going to start with another question, which maybe is almost as unfair. So in 1923, who wrote the quote is now, "The fairness of taxing more lightly income from wages, salaries and professional services than the income from a business or from investment, is beyond question"?
Larry Zelenak:
You probably got that quote from my book so I'll be embarrassed if I get it wrong. I'm guessing Andrew Mellon.
Steven Dean:
That's right. You got it. He seems pretty sure of this.
Larry Zelenak:
Yes.
Steven Dean:
But, this does not seem like something that would be obvious to someone today.
Larry Zelenak:
No, for sure. And I think a lot of what was going on with the early interest, like in the '20s and '30s in favorable rates for earned income, was a notion that with earned income, you had to save some of it for retirement. Whereas with income from investments, income streams from investments like interest and dividends, the principal, and therefore the income stream, went on forever. So you didn't need to save for retirement out of your income in the same way.
Larry Zelenak:
But that argument showed a failure of imagination in the sense that, well, if you have to save some of your earned income to finance your retirement, the more obvious way to deal with that is the way we deal with it now, not by having a special low rate for earned income, but rather qualified retirement savings.
Steven Dean:
Right, so you provide a tax benefit to encourage retirement savings. Honestly, when I read that in your book, that was the first time I'd encountered that argument. But what I loved about it the most is how self-evident it seemed to Mellon.
Larry Zelenak:
Yeah, which is striking, especially since you might think of Mellon as more a friend of capital than a friend of labor. Although I think part of what's going on there is you have to remember that in 1923 only something like 5%, if that, of the labor force was subject to the income tax. So when he was talking about break for earned income, he was talking about a break for lawyers and doctors and accountants and bankers and people like that. So it was itself the upper 2% of the income distribution that he was concerned about, even when he was concerned about labor income.
Steven Dean:
Some of the surprises in Zelenak's work can be explained by the passage of time and the different way we understand the world today. Others require a little more explanation. Why do you think the 1040 is a good thing?
Larry Zelenak:
Yeah, so as you know, Steven, I published a book a few years ago with the title Learning to Love Form 1040. And the basic argument in the book is that the idea of a return-based mass income tax, where almost everybody has to interact with the tax, although it's a pain and I would not try to defend the amount of effort that the current tax system requires of individual taxpayers, I think the basic idea of saying that we're going to have a tax system that you can't just ignore, that you have to pay attention to, that requires at least a few hours of your attention every year is not at all a crazy idea.
Larry Zelenak:
If you think of there being two great civic obligations of citizenship, one is to participate in the political process through voting and the other is to participate in supporting the government through paying taxes. We have a ceremonial aspect to voting, at least traditionally we have, where everybody stands in line at the polls. And I think one gets a warm glow of political citizenship, at least sometimes, from doing that. Well, but my argument is, at least ideally, one would get a warm glow of fiscal citizenship from preparing one's 1040 and being a wide awake taxpayer rather than a sleeping taxpayer.
Steven Dean:
Well, I have to confess that I brought my ten year old to vote with me last year, but I did not involve him in the return filing process at all, for which I'm sure he is immensely grateful.
Larry Zelenak:
You know, traditionally, the thing to do would have been to take him down to the post office with you to mail the return. But, I guess now pretty much all you can do is have him watch when you press send.
Steven Dean:
This idea of fiscal citizenship is important to Zelenak's work. It also proves to be an important theme in literature.
Larry Zelenak:
David Foster Wallace had as good a claim to being the leading or serious American novelist of his generation as anyone. He died, committed suicide a few years ago. And at his death, he left an unfinished novel set in a fictional IRS Return Processing Center in the Midwest. The title of it was The Pale King. And his editor, Michael Pietsch, put it together. It's obviously not exactly what Wallace would have done had he lived, but it reads pretty well. It's quite readable even though it's not finished, let's put it that way.
Larry Zelenak:
And one of the things that I thought was especially interesting, from this perspective, Wallace I think is concerned or interested in exploring two themes. One is boredom in the workplace and that's obviously a tricky theme to engage with in literature because discussion of boredom tends to be boring. But I think he actually does a pretty good job with it. As someone who thinks that tax is actually pretty interesting, I was a little distressed that he thought that tax was the obvious go-to area to explore boredom.
Larry Zelenak:
But setting that aside, the other thing that he was really interested in was civic responsibility and fiscal citizenship. So it fits in with a lot of the themes I've been interested in anyway. And one thing he does that, from this perspective, I think is really cool because he manages to hold this at arms length and yet get it out there, he has a highly respected upper level IRS official give a speech about fiscal citizenship and how important all this is to literally a captive audience. It's delivered while he and his captive audience are in a stuck elevator.
Larry Zelenak:
And he goes on for about half an hour using quotations actually, Wallace doesn't say this, but I recognize them from Sheldon Cohen, a former IRS Commissioner, and he puts those words into the mouth of his fictional character giving the lecture in the stuck elevator. So on the one hand, I think Wallace really believed in the fiscal citizenship aspects of tax paying. And I think on the other hand, he recognized that in real life the only way you can get someone to sit still for that was to hold them captive.
Steven Dean:
Or make them take a tax policy class.
Larry Zelenak:
That would work, too. If there were academic credit involved, that might be another way.
Steven Dean:
I count on that. I'm going to move now to the pencil question and I'm going to show you the pencil in question here. It is a beautiful NYU Law Graduate Tax Program pencil.
Larry Zelenak:
It's a spectacular pencil and I really hope I can be worthy of it.
Steven Dean:
I believe in you, Larry. I believe in you. Let's just see what happens here. Let's see what kind of magic we can create here. So the question is pretty simple. Who was President when the Investment Tax Credit was created? So I'll give you three options. It was either Kennedy, Reagan or Nixon.
Larry Zelenak:
I think it was probably Kennedy.
Steven Dean:
All right. This is a pretty good bet. So I'm going to tell you that was correct. The fun tax fact associated with this fun tax fact is that it was Stanley Surrey who was responsible for creating it and you and I both know that Stanley Surrey was no fan of tax expenditures. Yet at Kennedy's behest, he created one of the most enduring of them.
Larry Zelenak:
Yes, there's an irony there. I suppose if he were here to defend himself, he would say something along the lines of well, what he was really opposed to was tax expenditures in the form of deductions and exclusions. He was somewhat less opposed to expenditures in the form of credits. But having said that, I think you've got it.
Steven Dean:
I've listened. If that's the only thing I can hold over Stanley Surrey, I guess that's not so bad because he's one of the giants of our field. This was apparently created during the run up to that campaign against Nixon. That was part of what drove the creation of it. I got that from an article, Pathway to Tax Reform. Inside baseball listeners will know that that's a reference to one of Surrey's books by Richard A. Musgrave, A Remembrance of Stanley Surrey in the Harvard Law Review. If you want to learn more about Surrey or about the origins of the Investment Tax Credit, you can check that out. I also owe a hat tip to Ajay Mehrotra at Northwestern and The American Bar Foundation for pointing out this fun tax fact.
Larry Zelenak:
And if there's any would-be biographers out there, I think Stanley Surrey really deserves a serious biography. And I understand all his papers are in the Harvard Law School's libraries.
Steven Dean:
Wow! You heard it here first.
Larry Zelenak:
I'm pretty sure I'm not going to write that [crosstalk 00:11:57].
Steven Dean:
Oh, I'm not so sure about that. I think you might be the guy.
Steven Dean:
Thank you for listening to The Tax Maven. And I also want to give a very special thank you to those that help make the podcast possible, Patrick Kelly, Joe Rivera, Greg Addison, Rebecca Carmichael, Jill Rachlin and Anthony Pietrangelo. And thank you, Rachel Burns.
Steven Dean:
The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web. Visit our Graduate Tax Program website to see the different programs we offer both in person and online, both for lawyers and non-lawyers. Take a look at what we offer and I hope you consider joining us.
Steven Dean:
And now, we like to end each of our episodes with a quote about taxes read by one of our students. Today's quote comes from Garrick from Bettendorf, Iowa.
Garrick:
When a taxpayer sells or disposes of property encumbered by a non-recourse obligation, the Commissioner properly requires him to include among the assets realized the outstanding amount of the obligation. The fair market value of the property is irrelevant to this calculation.
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions. And if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.