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Posted May 26, 2011

Professor Ethan Yale's Tax Law Scholarship Earns Faculty Award

Yale

Ethan Yale, a University of Virginia law professor who focuses on tax law issues with real-world repercussions, was awarded the Law School’s Professor Carl McFarland Prize on Friday.

The prize goes to a junior faculty member for outstanding research.

“It was very exciting. I was very pleased to be recognized,” Yale said.

Yale, the Hunton & Williams Professor of Law, joined the Law School in 2009 after serving on Georgetown University’s law faculty.

“Ethan’s work combines intellectual rigor with policy relevance,” said Dean Paul G. Mahoney. “He has weighed in on longstanding and thorny issues in tax policy. He has also tackled new problems, such as whether the tax system will interfere with the efficiency of tradable permits as a mechanism to reduce pollution.”

Yale said he focuses his research on fundamental questions in tax policy, such as whether corporate dividends should be taxed, as well as issues at the forefront of tax practice, such as what qualifies as a partnership for tax purposes.

“Unlike some tax academics, I think it is important to write scholarship that is relevant and interesting to practicing tax lawyers,” Yale said. “I like to engage in conversations that are important to practitioners, judges and others who have to advise clients and apply the law in the real world.”

Yale became interested in tax law while working in financial markets as an assistant bond trader after college.

“I found [tax law] to be more interesting and analytical than many of the subjects I studied in law school,” Yale said. “I also like the fact that many questions posed in tax law have discrete answers rather than just arguments on both sides. There’s oftentimes a clearly correct outcome and that determinacy is lacking in a lot of legal subjects.”

Yale’s scholarship includes an article in the Virginia Tax Review on the taxing of corporate dividends. The tax law creates a bias in favor of corporate redemptions — or selling shares back to the company — over paying dividends, he said.

“There’s a built-in tax penalty for paying dividends, so it provides a convenient excuse for empire-building by corporate managers,” Yale said, pointing to Apple, which has refused to pay dividends.

Corporations like Apple can argue they are helping shareholders by not paying dividends, since doing so would subject shareholders to tax liability.
 
“It’s not clear that that’s true. Maybe the shareholders would choose to reinvest the retained earnings in something that would be more profitable,” Yale said. “The tax law shouldn’t put a thumb on the scale in favor of redeeming shares as opposed to making dividend payments on shares that are already outstanding.”

Yale is now working on an article about the intersection between monetary inflation and tax policy.

“The convention in tax policy circles is to assume that tax laws have no effect on the rate of inflation, and essentially in this paper I intend to sketch out what happens if you relax that assumption,” he said.

Yale pointed to a strand in finance literature stretching back to the 1970s in which financial economists argue that the tax rate correlates to the rate of inflation, which directly contradicts what public finance economists and tax academics assume is true.

“If you accept the teachings of these financial economists that the higher the rate of tax, the higher the rate of inflation will be, what does that do to our conventional understanding of the difference, for example, between income and consumption taxation or the desirability of indexing the tax code for inflation?” he said.

Yale is also studying the federal tax penalty system, which has grown highly complex as a result of legislative and regulatory enactments that began in response to the proliferation and abuse of tax shelters in the late 1990s and early 2000s.

“There’s been a huge uptick in the volume of rules regulating taxpayer conduct and taxpayers who take aggressive tax positions, and also governing their advisors, both accountants and lawyers,” he said.

Yale said he believes the U.S. government should adopt some form of consumption tax.

“The big idea that I think should penetrate actual tax policy on the ground is that we should stop trying to tax capital income,” he said. “The United States is not successful in its attempt to tax capital income largely because of the ingenuity of tax lawyers and advances in financial engineering. Policymakers’ relentless attempts to tax capital income have created a mountain of enormously complex rules that are costly to comply with and to enforce. Notwithstanding their complexity, these rules are largely ineffective. At a certain point I hope politicians will realize this.”