Excerpted From: Jeremy Bearer-Friend, Paying for Reparations, 67 Howard Law Journal 1 (2023-2024) (256 Footnotes) (Full Document)

JeremyBearerFriendThe debate over reparations for the enslavement of Black Americans is older than emancipation. It is a debate that continues. In the wake of the Civil War, Black Americans immediately sought reparations but were denied. The only reparations provided by the United States federal government were to the former owners of enslaved people who brought claims for 'lost property’ as a result of emancipation. Calls for reparations continued through the early 20 century, the Civil Rights Movement in the midcentury, and further into the 20 century. are now a major flashpoint in our 21 century.

A recurring feature of the reparations debate is the amount of money to be spent on reparations--how should such a number be estimated? One strategy is to look to tort law as a model for estimating harms and awarding damages based on a current dollar valuation of the costs imposed. An alternative approach to arriving at the amount of funds needed is to estimate the dollars required to close the black-white racial wealth gap. The consensus position across all of these different estimates is that reparations must be trillions of dollars.

Once a dollar amount has been decided on, reparations advocates then arrive at the funding question--how to pay for reparations? This is the central question of this Article. Part of the difficulty in answering this question is due to the enormous scale of funding needed. The challenge of identifying a funding mechanism for reparations has been described as a “real and valid constraint” for actually achieving reparations. Yet, despite its material significance, the question of funding is often left out of academic reparations proposals or only thinly sketched out. When discussed, the funding mechanisms are typically borrowing, printing money, or taxes.

If taxes are chosen as the primary policy instrument for financing reparations, there are limited options. For example, the 500 largest corporations representing over 85% of corporate earnings, reported a total profit of $765 billion in 2018. Hence, it would take eight years of a 100% tax rate on corporate income to reach the lowest cost reparations target of $5.7 trillion--a tax policy that is neither appealing nor politically viable. The inadequacy of the corporate income tax, which is one of the most politically popular taxes but yields relatively low revenue as a share of the federal budget--helps illustrate the scale of the tax policy challenge for funding reparations.

This Article attempts to answer the question of how the United States federal government can pay for reparations. It does so by proposing a unique tax funding mechanism: contributions of equity rather than cash. The policy choice to limit the menu of possible taxes to cash remittances places an extraordinarily effective, yet fundamentally unnecessary, ceiling on the capacity of public institutions. In-kind taxpaying--tax liabilities remitted in noncash property--is both viable and, in some instances, preferable. The proposal in this Article to capitalize a reparations fund using in-kind remittance is just one example of the potential of in-kind taxpaying. Unlike past proposals to replace corporate tax remittances in cash with corporate tax remittances in equity, this Article proposes a remittance of equity that would be in addition to existing income tax bases. Under the terms of this proposal, our federal government could successfully capitalize a multi-trillion reparations fund in less than a year.

To date, tax scholars have had a limited role in engaging with reparations for slavery. The most prominent tax figure to write on the subject is Boris Bittker, who offers a pessimistic, book-length account of the unlikelihood of achieving reparations in the United States. In response, Derrick Bell suggests that Bittker's efforts “constitute less a contribution to legal scholarship than the ultimate in societal conceit.” More recently Andre Smith and Carlton Whitehouse propose a more direct relationship between tax and reparations. Rather than looking to tax policy as a “pay-for” to cover the associated public costs, they see tax policy as a potential policy instrument for disbursing reparations in the form of refundable tax credits. Most recently, Dorothy Brown has analyzed whether reparations payments themselves should be taxable. Each of these questions remains important--whether to have reparations, whether reparations should be in the form of tax expenditures, and whether reparations should be taxable--but they are not my questions. For this Article, I answer the question of how to raise over a trillion dollars to pay for reparations.

While many of my readers will come to this subject already in support of reparations, some may approach my conclusion about how to pay for reparations as a starting point in their assessment of the appeal of reparations for slavery. This is because one of the most repeated critiques of reparations is viability. are obstructed, in part, because they are viewed as unrealistic due to financial constraints. Establishing a clear and specific financing mechanism for reparations is thus a gateway for moving reparations from an idea to a reality. What is imaginable then becomes possible. The proposal presented in this article could also be voluntarily adopted by the private sector as a form of corporate philanthropy in response to the Black Lives Matter Movement.

The mechanism of funding reparations through in-kind remittance of equity rather than cash has a number of advantages. Most importantly, it is at the scale necessary to rapidly achieve a multi-trillion valuation because the taxable base is so enormous: the market capitalization of all firms in the United States. And because this taxable base is so vast, the statutory tax rate can be quite low, further adding to the political appeal. Additional advantages are that this is a new taxable base, so an in-kind remittance of equity does not crowd out the opportunity for a national Value Added Tax (“VAT”) to finance other public priorities. Relative to a cash tax liability for a wealth or property tax base, in-kind remittances do not have the same valuation challenges since merely a proportion of firm value is transferred. In-kind remittance also does not create the same liquidity issues that a cash tax would. It would be a substantial cash flow challenge for many firms to free up an aggregated $5 trillion in cash, but equity issuances are routine and do not require cash on hand.

The tax proposal included here also nominally targets politically disfavored groups--large corporations, many multinationals--rather than individuals or households. And the tax has a progressive incidence--it is effectively on the shareholders of firms. The top 1% of households in the United States hold 54% of all stock. Nearly 40% of United States households have no shares of stock.

Although the requirement that firms remit equity rather than cash may seem radical at first, the reliance on in-kind exchanges in lieu of cash transactions is actually quite common in the private sector. Indeed, the reparations proposal could follow the mold of many private sector arrangements for capitalizing a fund.

It is also common for the governments of capitalist economies to hold shares in private enterprises. Many countries have sovereign wealth funds where a publicly accountable fund, whose beneficiaries are also ultimately the public, holds equity interests in both domestic and global firms. The largest one of these is a $1.45 trillion retirement fund in Norway. The Norwegian sovereign wealth fund is a “shareholder in more than 9,000 publicly traded companies.” Other countries are seeking to follow suit, with the recent corporate tax windfall in Ireland to be used to create such a fund. In addition to both private and public analogs of public funds that own portions of private enterprise, we also have a variety of forms of in-kind remittance for tax obligations here in the United States. These occur at the federal, state, and local levels.

Beyond the administrative advantages of in-kind remittance, there is also a philosophical appeal to this proposal that relates to the underlying rationale for reparations. If we assume that the current arrangement of our economy is the direct result of the compounded racial inequality that originated with slavery, then a redress of that unjust enrichment requires a reordering of existing wealth. The proposed multi-trillion reparations fund provides a limited share of equity in all firms to those previously excluded from and exploited by the United States marketplace.

Once a tax base has been identified and the form of remittance has been selected, there are still many technical design choices to work out. Identifying these design choices and posing recommendations is one of the major contributions of this Article, moving from the idea of in-kind remittance of equity to a concrete proposal that could be enacted. The eleven design choices that I elaborate further are: the selection of firms that are included; the timing of the contributions; the class of stock to be remitted; whether there is a par value for the stock; whether the stock is convertible; if there is a buy-back option; if there is restriction on resale; the equity formula for firms with multiple classes of stock; the equity amount; the governance of the fund; and any potential registration requirement for the remitted securities. The versatility of in-kind remittance means that there are many different permutations of the proposal that could ultimately be introduced as legislation.

Despite the appeal of in-kind remittance to capitalize a multitrillion fund, there are of course some challenges. The value transferred to the fund is the result of a dilution in value of the existing shareholders' stake in the impacted firms. Because many of the largest institutions that hold shares are pension funds, many household retirement accounts will lose value. An adoption of this proposal requires accepting this consequence. The value of the fund itself would also be more volatile than a fund with cash holdings or one with a dedicated annual income source. As with the corporate income tax, firms will also try to avoid this new liability. Some of the anti-abuse tools that already exist in the conventional income tax arena would also be available here, but some additional guardrails would be required. One specific backstop on possible gaming of the new reparations tax is to require the new issuances be of identical proportion to existing outstanding classes of stock, so that a firm would not be able to target any dilution toward the specific classes remitted to the fund.

One of the most conspicuous issues with this tax is constitutionality. I do not attempt to answer that question here. In the case of a wealth tax, multiple law review articles are entirely devoted to the specific question of constitutionality--a question that only arises once there is an actual proposal to be considered. The ambition of this Article is on the mechanics of the reparations tax proposal. There is also a sufficient body of work on the constitutionality of wealth taxes that could extend to this proposal and provide colorable claims of constitutionality rather than position this idea as a pure thought experiment.

This Article proposes an extraordinary tax that is commensurate with an extraordinary debt. The specific parameters of the tax are that the contributions would be in the form of firm equity rather than cash. This allows for remittance at the scale necessary to repay the debt and could be done rapidly. The requirement that all firms issue a proportion of ownership into a reparations trust fund managed for the benefit of descendants of enslaved people also comports with both the corrective justice and distributive justice foundations for reparations.

This Article proceeds as follows. Part I briefly describes the need for reparations, with an emphasis on the rationales that most directly inform the design choices to structure the financing of the fund and the scale of the problem--the amount of dollars required to adequately repair the harm of slavery. Part II gives an overview of the options available for financing reparations, including but not limited to, taxes. Part III is the heart of the paper and describes the original tax proposal, including eleven distinct design choices in structuring the in-kind remittance to capitalize the multi-trillion dollar fund. Part IV describes other private sector analogs to in-kind remittance, further demonstrating the routine nature of such remittances and the viability of structuring tax payments without cash. This Part IV also discusses the longstanding practice of sovereign wealth funds, wherein public entities hold equity interests in private firms. Part V discusses five potential criticisms of the proposal. After establishing the features of the proposal, its common usage in the private sector, and possible concerns with the proposal, the Article concludes in Part VI by summarizing the appeal of in-kind remittance to achieve reparations in the United States.

[. . .]

This Article has provided a unique tax policy tool for capitalizing a multi-trillion reparations fund. The level of detail provided in this proposal also contributes to the broader literature demonstrating the viability of a federal reparations program at the scale required to address the enduring harms of slavery that continue to define our social and economic life. Unlike scholars that have sought to justify reparations, or scholars that seek to estimate the necessary size of reparations, this Article offers a proposal for how such reparations funds can be collected. Under the terms of this proposal, our federal government could successfully capitalize a multi-trillion reparations fund in less than a year.

Associate Professor of Law, GW Law School.