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Furman is right that taxing student debt forgiveness would undermine its effectiveness. But fortunately, he’s wrong that it would be actually be taxable. The mistaken belief that forgiveness is taxable has become conv. wisdom, but is based on a misunderstanding of the law. 1/ https://twitter.com/jasonfurman/status/1328193936364539909
First, the history is that IRS ruled multiple times in 50s-60s that student debt forgiveness was a non-taxable “scholarship.” But after a SCOTUS case (not related to debt) narrowed that exception, IRS decided in 73 that debt forgiven due to public service couldn’t count. 2/
So Congress in 84 added the exclusion for PSLF into the tax code to plug that hole. That’s why the tax code is silent on most other types of student debt forgiveness—the law was already established. 3/
Second, the IRS has also already provided a safe harbor against tax forgiveness in cases where the borrower has a “defense against repayment.” Among other things, the safe harbor is based on an exception to taxing forgiveness if a borrower is insolvent. 4/
IRS said most likely borrowers would be insolvent (or other exceptions would apply) and it wasn’t worth trying to figure out who for small amounts of revenue. So just declining to check. Exercising its discretion, similar to DACA. IRS could extend that ruling. 5/
Third, if forgiveness is done for the “general welfare,” a broad exclusion applies. This is why we don’t tax things like disaster relief payments, housing subsidies, payments to the blind, working training payments, etc. 6/
Indeed, if the forgiveness is due to COVID, the tax code would explicitly exclude it as a “qualified disaster relief payment. 7/
Finally, there are a bunch of technical tax rules that apply to debt instruments that make taxing student debt forgiveness far from certain. See discussion on contigent liabilities and significant debt modification in the attached. 8/
https://papers.ssrn.com/abstract=2841424
https://papers.ssrn.com/abstract=2841424
The technical tax stuff comes down to fact that student debt is *really weird* from a legal standpoint. IDR esp. makes it not like any other debt, to the point of barely being debt at all. If you want more on that in great detail, see here: 9/9
https://papers.ssrn.com/abstract=3550070
https://papers.ssrn.com/abstract=3550070
