At Northwestern Pritzker School of Law, distinguished faculty members are at the vanguard of tax law scholarship, dedicating their careers to advancing the field through rigorous research and interdisciplinary analysis. Renowned for their expertise, they draw upon legal, historical, and philosophical methodologies to produce influential scholarship in leading academic journals, books, and policy papers. Their insights not only illuminate critical tax policy questions but also shape the future of tax law on a global scale.
Here, they share their perspective on the most important policy questions or debates on taxes and what to expect in the future.
Today, individual income taxes are the largest source of funding for the federal government, comprising 49.3 percent of total revenues for Fiscal Year 2024, according to the U.S. Treasury Department. But federal income taxes are a relatively new construct.
In 1913, the 16th Amendment of the U.S. Constitution was ratified, enshrining the right of Congress to levy income taxes. Before then, there had been times when the federal government collected income taxes, such as during the Civil War. But by and large, funding for the federal government came from tariffs and excise taxes.
Widespread income taxation did not start in earnest until after World War II, when the economic expansion in the United States and employment at large companies made it relatively simpler for the government to collect taxes from labor income, says Professor Ari Glogower, an expert in federal tax law and policy whose research focuses on progressive tax theory and design, and on economic inequality in the tax system.
“It was relatively easy to tax certain forms of income,” he says. “For example, most wages and salaries were relatively easy to measure, and after the 16th Amendment an income tax was clearly constitutional.”
Importantly, Glogower notes in that period, the income tax was structured in accordance with the idea that fiscal capacity could be expanded in accordance with principles of distributional fairness.
“During some of the years, the highest-taxed individuals faced marginal tax rates—at least on paper—of up to 70–90%. The tax structure reflected the view that taxpayers with greater capacity to pay would contribute at proportionally higher rates,” he says.
But even though the income tax was settled law, there were policy questions and political debates to define what constitutes income tax nearly from the beginning, says Professor Ajay K. Mehrotra, Stanford Clinton Sr. and Zylpha Kilbride Clinton Research Professor of Law, who is also an affiliated professor in Northwestern’s History Department and a research professor at the American Bar Foundation. Mehrotra’s research explores law and political economy in historical and comparative perspective with a particular focus on tax law, fiscal policy, and economic inequality.
Mehrotra writes that national emergencies like war have led to dramatic transformations in the income tax. “World War I was an important inflection point for the development of the income tax because, during the war, marginal tax rates skyrocketed and exemption levels declined,” Mehrotra notes based on his historical research. “After the war, there was great debate about what constituted capital gains and taxable income.”
World War II was a second important watershed moment. “During the Second World War, the income tax was transformed from a ‘class tax’ aimed mainly at the wealthy to a ‘mass tax’ geared toward a vast number of everyday taxpayers,” Mehrotra says. “But there were still many open issues about what constituted taxable income.” After World War II, top marginal income tax rates remained relatively high and exemption levels were historically low; thus, many Americans were more cognizant of their annual federal tax burdens.
“During the Second World War, the income tax was transformed from a ‘class tax’ aimed mainly at the wealthy to a ‘mass tax’ geared toward a vast number of everyday taxpayers.”
– AJAY MEHROTRA
As a result, tax rates became a political rallying point, as members of Congress—up for election every two or six years—often pledged to reduce the tax burden on their constituents. In the 1980s, political pressure to reduce income taxes led to widespread reform and lowering of the top marginal rates; today, the highest earners face statutory marginal tax rates as high as 37 percent.
“Today, you just don’t have the political will to increase taxes, from either political party, and so you have these anti-tax fervors sweep the government,” Mehrotra says.
Over the years, policymakers and legislators have struggled to distinguish between taxes on “earned income” (ie, wages, tips and bonuses), and income from investments.
In general, certain forms of investment income, such as long-term capital gains, are taxed at a top rate of 20 percent, compared to up to 37 percent for earned income. But even that seemingly straightforward approach is open to different interpretations. In addition, the distinction has been challenged in some cases, such as in the rise and expanded reach of private equity firms and new forms of compensation such as “carried interest.”
“So now the question becomes, what is included in the scope of the income tax?” Glogower says. “The tax system is successful at taxing some forms of labor income, but less successful at taxing capital income.”
For Glogower, this question is more than an esoteric question about income classification for a small number of people.
“It’s a sense of fairness,” he says. “Partners at law firms, who are advising clients on business strategies, see their income and bonuses taxed at the top marginal rates. The same is true for many business owners or advisers at wealth management firms. But if you run a private equity firm, suddenly, your tax rate could be only 20 percent.”
In addition, Glogower’s research has examined the ways that well-to-do taxpayers have employed strategies to reclassify their income to lower, or even avoid entirely, income taxes, such as by avoiding “realization events” that would trigger income taxation.
“Not surprisingly, the people who have the most resources generally use a wide range of strategies to reduce their tax liabilities,” he says.
Over the years, advocates have called for various “reforms to tax wealth or to increase the taxes paid by the wealthiest citizens, which can also face political headwinds or legal challenges,” Glogower says.
“The biggest tax policy question for our time is how we can raise needed revenue in a manner that is both effective and fair. We are really just starting the second century of the federal income tax.”
– ARI GLOGOWER
Glogower believes that even the fact that a wealth tax or capital income tax reform is being discussed now is proof that there is a change going on in society’s view about fairness and how tax policy can be used to make society fairer. With income and wealth inequality at historic levels, Glogower believes there is a place for more legal scholarship into how tax reforms can be used to make the fiscal system more fair.
He argues, however, that designing a more fair and effective tax system will require thinking more broadly, beyond just questions about tax rates and the definition of the tax base. Glogower recently published a new book titled “Untaxed: The Rich, the IRS, and a New Approach to Tax Compliance,” which explores how principles of fairness and progressivity can be embedded in the rules governing tax compliance and administration.
“The biggest tax policy question for our time is how we can raise needed revenue in a manner that is both effective and fair.” Glogower says. “We are really just starting the second century of the federal income tax. In a changing economy, we should be asking, what are the factors that might influence the evolution of the tax system? What tools do we need to look at to use to make our tax collection system more efficient and more fair?”
Tax policy must also wrestle with how to tax companies or individuals from other countries, a necessity that is challenged by global trade and diplomatic relationships. One of today’s most pressing issues is how to fairly apply tax rules to companies that do business in multiple regions and ensure that the profits from their activities are fairly taxed, says Genevieve Tokic, associate director of the Tax Program at Northwestern Pritzker Law.
Generally, in cross-border transactions, a corporate tax is applied in the home country of a corporation based on its residence. However, a country where significant activity takes place, such as manufacturing products or providing services through employees of the foreign corporation, could also levy an income tax on the profits derived from activities in that country (generally referred to as source-based taxation). The home jurisdiction of the corporation typically would typically provide a tax credit or exclusion for the foreign-source income taxed by that other jurisdiction, to eliminate any double taxation of the income. An elaborate tax treaty network has developed over the past century, providing certainty about the allocation of taxing rights between residence and source jurisdictions. This worked relatively well when the profits of multinational corporations were earned from, for example, high-value manufacturing, or other activities involving physical presence of some kind.
“Think about a company that manufactures tractors, for example,” Tokic says. “Certainly, there is intellectual property, or IP, involved: patents and know-how related to the manufacturing process, trademarks, and so on, but you know where the manufacturing is occurring, even if the supply chain is broken up and different components are produced or assembled in different jurisdictions. In this system, it was easier to identify and isolate the value-add at each step and apply tax to the income in the appropriate jurisdiction.”
“Most of the profit centers for today’s highly profitable companies are not necessarily where there is physical presence.”
– GENEVIEVE TOKIC
Now, though, the most profitable companies in the world are no longer manufacturers of heavy machinery; they are making personal electronic products or providing access to the internet for free and generating revenue from advertising and user data.
“Most of the profit centers for today’s highly profitable companies are not necessarily where there is physical presence,” Tokic says. “Think of Starbucks. Every week, I give my daughter $10 to go get something with her friends—the current favorite is something called a ‘Pink Drink.’ That’s a pretty expensive beverage. You’re paying for the brand, and not just whatever they put in that cup. But where and how should you tax that?
“Yes, there is income from sales in each jurisdiction, but so much of the profit can arguably be attributed to something other than what is happening at, say, your local Starbucks in London or Chicago or wherever. But this is not without controversy. Starbucks has faced a lot of criticism in the UK for paying very little UK corporate tax in spite of high sales there, in part because Starbucks UK pays significant licensing and royalty fees to other Starbucks entities.”
Tokic and colleagues are finalizing a paper on reforming the U.S. foreign tax credit rules in light of the new global minimum tax and the OECD/G20 Inclusive Framework, Pillars One and Two project more generally. Under the Pillar Two global minimum tax, countries are adopting rules implementing several interrelated tax rules that are designed to operate together to ensure that a 15 percent minimum tax is levied on corporate income (based on financial statements) for large multinational corporations, in order to stop a global tax “race to the bottom,” in which countries compete to attract corporate activity by lowering their tax rates.
So far, the United States has not adopted the Pillar Two rules and is extremely unlikely to do so under the Trump administration. There is concern that the United States could lose out on tax revenue to other jurisdictions if reforms are not made, and this is one of the issues Tokic and her colleagues take on in their paper.
There are also potential pitfalls for U.S. companies related to possible double taxation, arising in part from novel taxes being implemented in other countries, such as digital services taxes (DSTs).
“We need a better understanding of how the Pillar Two taxes interact with the existing U.S. international tax rules. There are legitimate concerns about the competitiveness of U.S. multinationals, as well as concerns about the United States’ share of corporate income tax, and that’s what we address in our paper.”
“The global tax system is becoming increasingly complicated at this moment,” Tokic says. “There are now DSTs, the new global minimum taxes, and of course tariffs are coming back into the discussion. But tariffs have never provided the level of steady revenue we need to fund our society, so I believe it is a fallacy to assume that tariffs will make up for reduced corporate income taxes. Not to mention the other problems with using tariffs as a policy tool. But all of this makes it a really interesting time to be studying and thinking about the international tax system!”
Philip F. Postlewaite, a professor and founder of the LLM Tax Program, points out that he has been studying taxes on partnerships for 40 years—and the questions are still not settled. In fact, his prior research highlights how a narrow focus on reforming one area of partnership tax law—say, to increase taxation on carried interests—lays bare the lack of progress made to offer wholesale changes to the tax code.
“After 40 years, we still do not have all of this right,” he says. “I think it is infinitely better to reform the entire system, rather than trying to tackle one issue at a time.”
Partnerships are a unique construct for businesses that have gradually expanded their reach. While partnerships are the dominant form of governance for law firms and other professional services companies, they are increasingly being used for investment purposes.
All of this leads to a complicated system, which requires businesses to continually investigate and develop legal strategies to ensure they are not afoul of the complicated rules. In addition, over the years, there have been political pushes to increase the rate of taxation on carried interests, which are taxed as investment income (up to 20 percent), less than the top rates for normal income (37 percent).
Postlewaite has argued that the discussion is too simple (tax successful investment groups more) because the suggested reforms do not take into account differences in how investment capital is treated by these companies.
“The treatment of the return on human capital and on invested capital has never been as clear or as singular as commentators suggest,” he writes. “The Code, for sound policy reasons, refrains from disentangling the return on human capital from the return on invested capital when the service provider ‘re-invests’ his or her return on human capital in the enterprise by forgoing annual compensation.”
He also points out many partnerships impose restrictions on transfer of capital, so that the delivery of returns functions more like restricted corporate stock—not the taxable earnings of executives or other employees.
For Postlewaite, the focus on politically attractive taxing targets misses the point of true reform: “With the misdirected emphasis on the tax treatment of profits interests, the real opportunity for reform of the area is overlooked,” he writes. “The ability to recognize income in the year of receipt of a restricted compensatory equity interest under Section 83(b) permits recipients to minimize the impact of the progressive rates. This treatment is far more inconsistent with the taxation of human capital than is the current tax treatment of compensatory profits interests.”
Going forward, Postlewaite believes that any tax reform discussions regarding the taxation of partnerships will take a backseat to the more pressing need in the near term, which is for Congress to decide whether to extend the Tax Cuts and Jobs Act of 2017.
“Major tax changes passed in 2017 (the Tax Cuts and Jobs Act) were temporary, so if Congress doesn’t do anything, they will expire by the end of 2025. That’s a very different choice for legislators. Normally, you’ve got a clean slate. Now, you’ve got a clock ticking on taking action, or taxes will rise. It will be interesting to see how they go about managing the politics with the policy.”
– PHILIP F. POSTLEWAITE
This current situation for legislators is unique: If they don’t do anything, taxes are raised. But to keep tax cuts in place, they have to take action.*
“Major tax changes passed in 2017 (the Tax Cuts and Jobs Act) were temporary,” he says. “So if Congress doesn’t do anything, they will expire by the end of 2025. That’s a very different choice for legislators. Normally, you’ve got a clean slate. Now, you’ve got a clock ticking on taking action, or taxes will rise. It will be interesting to see how they go about managing the politics with the policy.”
* The interview preceded the enactment of the new tax bill.
For Mehrotra, research into application of tax laws and new policies can’t divorce themselves from the important matter at hand: budgets.
“Taxing and spending really gets at the heart of the matter—what is the priority of the government? What do you want to spend money on? And how will you raise that money?”
For Mehrotra, the most pressing problem is that political leaders want it both ways: they want to slash taxes and raise spending. The old way of understanding politics—conservatives (Republicans) cut back on spending while cutting taxes, while liberals (Democrats) raise taxes to increase spending—has gone out the window, he argues.
“Today’s political parties are not like the past,” he says. “We are hitting a really dangerous point with the federal debt. In the past, you would have Republicans arguing for cutting back, with a discussion around making sense of what we are spending our money on.
“But I don’t think we’ll see much more than nibbling on the edges in the near future, such as modifying the cap on the deduction for state and local taxes, such as property taxes.”
“What we know, historically, is that dramatic changes in tax and spending come in a crisis. We get fundamental tax reform when we need it, not necessarily when we want it. Unless there is a major economic dip or international crisis, don’t expect to see much fundamental change.”
But Mehrotra, though a realist on the chances of changing tax law, believes that the current system of taxing and spending on social programs is not working and leads to greater mistrust of government.
“Because so much revenue is raised from income tax, taxpayers are very aware of the amount they are paying and the rates that are levied,” he says.
“At the other end of U.S. fiscal policy—the transfer side of the tax-and transfer system—American social welfare benefits are frequently provided in a much more inconspicuous manner. They are delivered either indirectly via the Internal Revenue Code or through public/private partnerships that obscure the pivotal role of the federal government. Indeed, as numerous scholars of comparative political economy have shown, the American welfare state is not so much a laggard compared to other affluent countries as it is a ‘hidden welfare state.’”
Take health insurance, for instance. In the United States, health insurance coverage is generally provided by employers, who receive an income tax break for providing the benefit to employees. But the general public does not “see” that benefit as coming from a government subsidy for private health insurance. Compare that to other countries, which have a national health system and therefore interact daily with the state for a benefit, he says.
In rich countries in Europe, broad-based national consumption taxes like value-added taxes (VATs) are often used to fund this wide social safety net.
“Why is the United States such an outlier in global comparisons of national taxes? Why have Americans historically resisted broad-based national consumption taxes of any kind? Simply put, why is there no U.S. VAT?” Mehrotra writes.
Mehrotra says that healthy, advanced democracies need a wide variety of funding sources and tax sources, not just income taxes. But the United States has been reluctant to use a regressive approach (which is what a VAT is) because of competing political theories: Democrats don’t want a regressive tax, which would affect poor people disproportionately, and Republicans do not want to have a direct funding mechanism for social safety nets.
At the same time, he points out that Congressional discussions around spending are often separated from raising revenue, which contributes to a lack of clarity or understanding among the society over what the taxes are used for.
“We really have to bring these two sides together, so that citizens can better support the taxes that are being levied and the programs that are being supported.”
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