Robert Goulder of Tax Notes interviews professors Lawrence Zelenak and Ajay Mehrotra about the recently published memoirs of Stanley S. Surrey, who is considered America’s greatest tax scholar.

This transcript has been edited for length and clarity.

Robert Goulder: Hello, everyone I’m Bob Goulder, contributing editor with Tax Notes. Welcome to the May edition of In the Pages.

Our featured article for the month is, “Stanley S. Surrey: A Life in Taxes.” It’s a preview of the recently published memoirs of perhaps the greatest tax scholar our nation has ever produced.

We’re delighted to have the authors as our guests. They are Lawrence Zelenak, a professor with Duke Law School, and Ajay Mehrotra, Executive Director of the American Bar Foundation and a professor at Northwestern Law School.

Gentleman, welcome to the program.

Lawrence A. Zelenak: Thank you, Bob. It’s great to be with you.

Ajay K. Mehrotra: Yeah. Thank you, Bob. Looking forward to the conversation.

Robert Goulder: For the benefit of someone new to our profession, say a young person just entering the job market, how would you describe the career and legacy of Stanley Surrey?

Lawrence A. Zelenak: As you said, Bob, I think that’s absolutely right that he is the greatest tax scholar in the history of the United States. Certainly in the history of the U.S. income tax.

He had really two careers. First, as a long-time Harvard Law professor. In that capacity he was, by far, the most cited tax academic. Then, he would go back and forth throughout his career between Cambridge and Washington. He had two tours of duty in the Treasury Department, ending up in the Kennedy and Johnson years as the assistant secretary of Treasury for tax policy, which as you know, is the highest position in the executive branch devoted exclusively to tax policy. That’s what he did in terms of his jobs.

His accomplishments are too numerous to do anything more than mention a few. For example, everybody in the tax world today is familiar with the concept of tax expenditures and the tax expenditure budget. Stanley Surrey is responsible for both of those.

Whenever anybody makes an argument based on horizontal tax equity, in other words taxing equally situated persons equally, that idea goes back to Surrey. When he started as assistant secretary, the IRC was less than half as long as it was when he departed, eight years later. No less a luminary than Irwin Griswold said that growth was primarily due to Surrey. To the extent anyone thinks the IRC is too detailed and too wordy today, Surrey has something to do with that.

He was a big proponent of broadening tax bases and lowering rates in connection with tax reform. Although he died two years before the Tax Reform Act of 1986 became law, his fingerprints were all over it. He was the primary drafter of the 1954 American Law Institute model income tax code, large portions of which were picked up by Congress in the 1954 IRC, including pretty much all of subchapter K dealing with partnerships.

The concept of joint returns for married couples, that comes from Stanley Surrey. Private lender rulings, that’s Surrey. He’s the air we breathe in the tax universe of the Unisted States. today.

Ajay K. Mehrotra: I would add one other thing for the viewers who are in the international tax world. Stanley was one of the leading founders of the Harvard Law School’s International Tax Program. The World Tax Series publications, those were his idea. Not his idea alone, of course, he did that in collaboration with a number of other scholars.

Through the Harvard program, by one count, Surrey educated somewhere in the neighborhood of 700 international tax professionals. Not just scholars, but policymakers. As I’m sure you know, Bob, that that program brought in tax officials from the developing world and throughout the globe to spend time at Harvard, not only for the publications but for a kind of training and educational format.

Surrey was an institution builder in the international tax world, in addition to all the things that Larry mentioned.

Robert Goulder: During his time with the government, when the length of the IRC roughly doubled, some will say that’s a mixed legacy. Do we need all those provisions? What do you have to say about that?

Lawrence A. Zelenak: My own view is basically the same as Surrey’s, which is that there’s a role for detailed statutes and there’s also a role for vague general statutes. In short, it all depends.

One important point that tends to get lost in fetishizing word-count or page numbers is that there’s a big difference sometimes between word-count and the lived complexity of the code. Surrey had an argument back in the 1950s regarding his draft of what is now section 61, the definition of gross income — which as you know, has a noninclusive list of more than a dozen examples of things that are included in gross income.

Another tax professor wrote an article complaining how that violated the elegant simplicity to have this illustrative list, because it would be better to say that gross income means all income and leave everything else to case law development; the list made section 61 longer and less elegant.

The obvious response is that it’s a lot easier for a practicing lawyer, or perhaps for a taxpayer doing research for herself — say, if you have a particular type of income and you’re not sure whether it’s included within section 61 — it’s a lot easier to do your research if you see there’s a list and it’s right there on the list, than if you have to go through a bunch of rulings in case law to determine of whether or not it’s been interpreted that way.

So a longer statute is not necessarily a more complicated statute. It all depends. That was Surrey’s view.

One thing probably worth noting in this regard, and Surrey would’ve been upfront about this, is that to a large extent everyone would agree there has to be fairly detailed rules someplace. The question is whether the detail belongs in the statute or the regulations. Putting it one place or the other doesn’t make it more or less complicated.

Surrey’s view on whether the detail belonged in the statute, on the one hand, or the regulations on the other hand, depended almost entirely on who was in charge of writing regulations at a particular period in time; who was in control of Treasury versus who was in control of the legislative process. If his friends were in Treasury, he said, the details should all go on the regulations. If his friends were on the Hill, he said it should all go on the statute.

Ajay K. Mehrotra: I would just add, Bob, a couple of things about that point; about the code becoming so much longer. I think Griswold pointed this out and Richard Musgrave also, a longtime teacher and good friend of Surrey’s and a well-known public finance economist. They both said the growing detail of the code was really because of Surrey’s systematic mind that he would pull on a thread and see all these subsidiary questions that had to be answered. It just got in his craw and I think that’s true. I think we see that in a lot of Surrey’s work, given he was the leading tax scholar and one of the leading tax policymakers for almost the entire 20th century.

If you think about it, the world got a lot more complicated. I talk about this when I teach tax, and I’m sure Larry and others do too. People complain about the complexity of the code, but life gets more complicated. The business world has gotten more complicated. Taxpayers and their advisors have gotten more creative. And there are these other dynamics that Surrey was clearly aware of, having been both in Treasury and academia.

I think the growth of the code during his time is due to those two things, his gnawing systematic and analytical mind, to pull the threads and get all the answers. And then that the world was constantly giving him more questions to deal with.

Robert Goulder: I love it when Surrey’s career touches the international area. One issue that comes up is tax sparing. The United States doesn’t like the practice very much. Some other countries like it a whole lot. To what extent are Surrey’s fingerprints over the present U.S. opposition to tax sparing?

Ajay K. Mehrotra: It’s a very interesting story. There was a treaty with Pakistan that has an . . . I don’t know if it’s an unknown provision. Surrey got in trouble when he would to say things like lawmakers were duped or didn’t know when things were in the law.

But there’s a provision in, I believe, our treaty with Pakistan in which this sparing provision comes up, sort of unbeknownst to others. Surrey really takes the lead with his contacts in Washington, including his brother — who, by the way, was a Washington lawyer who he kept as part of his network. He brings it to the attention of lawmakers and takes a very strong stand against it.

I think it’s fair to say that it’s because of Surrey that the provision was actually removed.

Lawrence A. Zelenak: I think it’s my favorite story in the memoirs because it combines a lot of intrigue and insights into Surrey’s personality with a lot of policy substance as well.

For any listeners who aren’t already international tax experts, tax sparing is basically when a country, typically as some kind of a tax holiday or at least as a tax reduction for foreign direct investment, it says that even though it normally taxes income at, pick a number, 20 percent — we’re going to tax this income at only 5 percent, or maybe not tax it at all. Then, the question is what effect that has on the foreign corporation on its U.S. tax liability.

The problem is, under the way the foreign tax credit ordinarily works, any tax that the foreign country decides not to collect wouldn’t end up going into the pockets of the U.S. multinational and thereby wouldn’t encourage it to invest in that country, because that would just be a dollar-for-dollar decrease of the FTC. The company would pay the same total tax that it would have paid without the tax break, because the U.S. would basically claw back the savings by allowing the smaller FTC.

The argument for tax sparing was to treat taxes that normally would have been collected by the foreign country, but were not collected because of the special tax holiday, as if they actually had been paid. You would get a FTC for taxes that were not really paid. And it’s hard to imagine something that bothers Stanley Surrey more than allowing a FTC for taxes not actually paid.

The other thing that’s cool about this, though, is this happened in 1957 when Surrey was a mere private citizen, a mere tax professor at Harvard Law School. He was in between stints in government service. You would think that if Tax Notes had existed all at that time, he could have written an angry letter to Tax Notes, but other than that he would’ve been unable to influence events.

What he did was to use his connection with his brother, Walter, to get the ear of the Senate Foreign Relations Committee. They actually held two hearings on the subject, all because of Surrey. And as a result, tax sparing didn’t happen. It’s only because of Surrey that it didn’t happen.

Surrey was so persuasive that not doing tax sparing in treaties remains standard U.S. international tax policy to this very day. He comments in the memoirs that a lot of developing countries think Surrey is the evil genie, because he’s the one responsible for the United States not doing tax sparing. I think descriptively he’s right. Whether evil genie is a good label or not, I’ll leave to people’s own judgment.

Robert Goulder: Surrey passed away in 1984, almost four decades ago. Why has it taken this long to get his memoirs in a publishable form?


Ajay K. Mehrotra: Some folks have known about the memoirs. They’ve existed for some time in the Harvard Law School library archives, and there are a number of tax scholars and historians who have reviewed them, along with his personal papers, which are also there. Lots of boxes of personal papers.

It was Larry’s leadership on this when he was poking around the personal papers, and I was as well, and Reuven Avi-Yonah, Joe Thorndike, Elliot Brownlee. A bunch of us had been poking around his papers, but it was Larry who said, “These are memoirs and they ought to be published in some format. We ought to get the word out.”

Thankfully, Larry asked me to collaborate and I’m grateful for that. We were able to take a manuscript, with some help from our staff and friends, and turn it into this memoir, which we took two or three years to annotate. It’s been quite a project and we were eager to do an introductory essay to help contextualize Surrey in his times and his achievements, and all he had done.

We have that introductory essay as part of the memoirs. That was fun to do, some early ancestral history on Surrey and learn a little bit more about his background and how much of a New Deal liberal lawyer he was. He was a liberal Democrat through and through, and that comes across in a lot of his policy pronouncements.

Robert Goulder: Let’s look at his work on horizontal equity. Is it fair to label Surrey as an equity theorist or an efficiency theorist?

Lawrence A. Zelenak: Absolutely equity. He could talk efficiency when he had to, but it wasn’t where his heart was. His heart was inequity.

Robert Goulder: There was some controversy there, and it had to do with market adjustments. Can you elaborate on the pushback against horizontal equity?

Lawrence A. Zelenak: On that question, I would refer anyone who’s interested in going more deeply into this into his appearance on Firing Line with William F. Buckley in 1974.

Surrey was pushing his usual thoughts about horizontal equity and that it seems unfair that most people who receive income have to pay tax on it at ordinary income rates, but people who receive municipal bond interest income don’t have to pay tax at all. And Surrey says, “That’s obviously unfair; a huge violation of horizontal equity.” Buckley replied with exactly your point, Bob. “Well, is there any inequity if the market adjusts, so the interest rate on municipal bonds equals the after-tax interest rate on corporate bonds?”

Surrey didn’t want to go there, but he was perfectly prepared to go there when he was forced to. He gave the answer, which I think was right at the time and is still right today, which is, “Well, it’s true that if the implicit tax, if the reduction in the interest rate on municipal bonds was sufficient to totally wipe out the tax advantage of municipal bonds for top bracket taxpayers. Then I couldn’t complain about inequity anymore. I could only complain about inefficiency. But, in fact, the implicit tax is not big enough to have that effect. So you get both inequity and inefficiency.”

It’s an interesting performance in the sense that, when he knew all of the market adjustment analysis and he knew how to basically make the point, either there’s inequity or inefficiency.

Ajay K. Mehrotra: Yeah. And in our introductory essay, and I think in the Tax Notes piece as well, we also referenced a debate he had in writing with Boris Bittker, his contemporary rival, which is also a very fascinating story that we outline.

He doesn’t mention it much in his memoirs, but Larry and I do, in our introductory essay. We point out that Bittker and Surrey didn’t always see eye-to-eye and they had some very fruitful and vigorous debates in writing. And this was one of them, the notion of horizontal equity. As well as tax expenditures. That second concept I think we’re going to get into.

Bittker was quite critical of the notion of there being some kind of ideal or comprehensive tax base, with which we could measure against for tax expenditures. The Bittker rivalry, as we’ll call it, is an interesting story that most people probably know about, but certainly for a new generation of tax scholars, it’s something worth revisiting.

Robert Goulder: Where was Bittker coming from, in his opposition to tax expenditure analysis?

Ajay K. Mehrotra: Before I get to that, I think we want to keep in mind that it’s more accurate to call Surrey the popularizer or the intellectual godfather of the tax expenditure budget. The institutionalization of what you’re talking about, Bob, is all about Surrey. That’s just his resilience, the invigilance in Washington to make sure that’s part of the part of the process. But as Larry and I point out, there were others who also identified this. Walter Blum, and much earlier, the number of German tax scholars had identified this. So, in this sense, Surrey really is a popularizer.

Where there was pushback from Bittker and others, it was an idea that had been floating around for some time. The first principle of what is the baseline. Right? If we can’t agree to what the baseline is, then we’re not going to agree on deviations.

Part of Bittker’s argument is really an early post-structuralist critique of what is a baseline. He’s not talking about truth and beauty here, but he is talking about a baseline and he is saying, “Sure, there are deviations. But your first principle is coming up with an ideal tax base or a comprehensive tax base.”

We talk about this in our introductory essay, that it was the Haig-Simons notion of economic income that was Surrey’s baseline. And Surrey pushed back a bit on that and said, “No, I’m a pragmatist, I’m a realist. I know that there are parts of Haig-Simons that you can’t really implement.”

His response, I think, was a very good one. It’s the response that most pragmatists gave to the postmodernist, post-structuralist argument. Sure, there may not be a single truth or a single baseline, but if a community of inquirers get together, and we agree that this is the best baseline we can come up with, well, we can then calculate deviations, identify deviations — as long as we all agree on what that baseline is.

And that’s essentially the retort from Surrey. I think it still holds today. Certainly when I teach tax expenditures, that’s how I deal with it. I say that this is a baseline, and that can be debated. But as long as there’s a community of inquirers, a community of scholars and policymakers who agree that this is how we should be measuring things.

His bottom-line goal was, as you point out, to bring greater transparency and accountability to the tax policy making process.

Lawrence A. Zelenak: Maybe the two best examples, to give you a flavor of their disagreement, are unrealized appreciation and imputed income, especially from owner occupied housing. Surrey didn’t treat the nontaxation of either of those as a tax expenditure, even though Haig-Simons would say they should both be taxable. And Bittker said, basically, why the heck not? And Surrey basically gave the answer that Ajay just gave, which is that’s not politically possible. Maybe it’s not administratively possible either, and I’m a pragmatist.

To my mind, I think the most telling point that Surrey made in his response was that Bittker was right in that, at the border, there’s debatable issues as to what is and is not a tax expenditure. But you don’t need to resolve those border issues to say that the tax exemption for municipal bond interest income is a tax expenditure. And most of the stuff in the tax expenditure budget is not at the border.

The other thing I’d add is just, as a matter of their personalities, Surrey was a great reformer and system builder. Bittker was a great skeptic and somebody whose natural instinct was to poke holes in other people’s arguments.

A lot of their arguments are based on their personalities. They’re coming at this from fundamentally different frames of mind. On the merits they’d actually agree a lot, but they end up disagreeing, in many respects, because they have different intellectual frameworks.

Robert Goulder: Who would you say has won the debate regarding the legacy of the tax expenditure budget? Is it working? Are there fewer tax expenditures today than there were a generation ago?

Lawrence A. Zelenak: A quick glance at the latest tax expenditure budget from either the Joint Committee on Taxation or Treasury would suggest that Surrey won in a sort of procedural sense. We have tax expenditure budgets published regularly, which is what he wanted. But he lost in a substantive sense because what he really wanted was the publication of these tax expenditure budgets to lead to repeal of most tax expenditures. And that obviously hasn’t happened.

One of the big objections that Surrey had to tax expenditures was that most of them back then were in the form of deductions or exclusions.

Those have this upside-down subsidy effect, where deduction of $100 is worth more to you if you’re in the 37 percent bracket than if you’re in the 10 percent bracket. Now, you could fix that without getting rid of the tax expenditure just by changing it into a flat credit, and to fully fix it you’d make it refundable as well.

And it’s been striking that in the last four decades, since Surrey popularized this concept, the itemized deductions have dwindled in economic significance and credits, and especially refundable credits, have grown to the point where now refundable credits, or credits in general, are a substantially larger tax expenditure than all of the itemized deductions. I think Surrey deserves posthumous credit for that.

Every time since about 1980, when Congress has decided to introduce a new tax expenditure for nonbusiness purposes, it has chosen to put it in the form of a credit rather than a deduction. That’s Surrey’s doing. So it’s a split decision in my view.

Ajay K. Mehrotra: What I found interesting in the memoir is that Surrey was, when he is in the Kennedy and Johnson administrations, the author of the investment tax credit. You want to scratch your head and go, “Wait a minute, that’s a tax expenditure. What’s he doing?” It’s to Larry’s point about Surrey being such a political realist and pragmatist.

What he saw in front of him was going to be new forms of accelerated depreciation deductions. He thought those were awful and ITC wasn’t great, but it was better than accelerated depreciation. And so, this was sort of his realism and pragmatism coming to the fore where he’s struggling with himself to support the ITC, but he does because he sees it as a lesser evil.

That kind of legacy of going to credits as a lesser evil than deductions and exclusions for the upside-down subsidy effect is one of his legacies from the tactic expenditure analysis.

Robert Goulder: The readers of Tax Notes will have read your piece and they’ll find the memoirs from Carolina Academic Press. Final question: Any hidden surprises they might look forward to? Any teasers of other things we can learn from the Surrey memoirs?

Lawrence A. Zelenak: Well, I found it really interesting to get some sense of Surrey as a person. And the most striking thing from that perspective is how he seems to have been absolutely all tax all the time. And that he barely mentions that he has a personal life.

His wife is mentioned only twice in the memoirs, neither time by name. Actually, it’s a story about how he disregarded her or her wishes in a particular situation. His son is never mentioned at all.

As far as one can tell from the memoirs, the only thing he did other than sleeping, eating, and breathing tax was that he did take off every summer to go sailing in New England and Canada.

But even then, he tells these stories about how he was writing articles on the sailboat, even though he didn’t have a tax library. And how he would phone in a tax advice to the Carter campaign from the dock during his sailing trip. He was close to all tax all of the time.

Richard Musgrave in a Harvard Law Review memorial issue on Surrey comments on this. He says, “I must have spent hundreds of hours with Surrey over the decades and I don’t remember ever having a substantial conversation with him about anything except tax.”

Ajay K. Mehrotra: Almost all other memoirs have at least some personal reflection, but here it is tax through and through, just as the title of the memoirs suggest. Not only the lack of reflection on family or leisure activities.

It is funny that he talks about being docked somewhere in Canada and having revisions he wants to dictate over a phone to Joe Peckman on an article they’re working on. So he is thinking about tax all the time, which I think in some ways is sad.

One way to read that is that he was truly dedicated to tax and making a better tax system. But it seems like there were so many other things that were missing, and that he missed opportunities that he might have had, not just in his met memoir, but maybe his life when you talk to scholars who knew him, like the Musgrave reflection. Just about everybody I’ve talked to that ever met him, said, “Yeah, that’s all Stanley ever talked about.”

Robert Goulder: Gentlemen, thank you for joining us again. The authors are Ajay Mehrotra, Executive Director of the American Bar Foundation and a professor at Northwestern University and Lawrence Zelenak, professor at Duke University Law School. The article is “Stanley S. Surrey: A Life In Taxes.” Indeed, an appropriate title when you think about Ajay’s last comments. You can find it in the May 2 edition of Tax Notes.

Ajay K. Mehrotra: Thank you so much, Bob.

Lawrence A. Zelenak: Thank you, Bob. And thanks to everybody else at Tax Notes for giving us this opportunity.


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