David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: prisoners' dilemma.

On the face of it, taxing a new group of people seems like a negative, but when getting taxed leads to having access to social programs like the earned income tax credit or social security, maybe being taxed isn't such a bad thing.

This week, we're looking at one such group: prison workers. Historically, they haven't gotten taxed for the work they do while incarcerated, which means they don't have access to the social safety net.

So what kind of changes can be made to rectify this problem?

Joining me now to talk more about this is Tax Notes contributing editor and Tax History Project Director Joseph Thorndike.

Joe, welcome back to the podcast.

Joseph J. Thorndike: Hey David, it's great to be here.

David D. Stewart: Now I understand you recently talked with someone about this issue. Could you tell us about your guest?

Joseph J. Thorndike: Sure, yeah. I spoke with Stephanie McMahon. She's a professor at the University of Cincinnati College of Law. She's been on the faculty there since 2008, and a lot of Stephanie's scholarship has focused on the historical relationship between taxation and the public's perception of taxation.

Now, take special note of that word historical because in addition to being a tax lawyer with a J.D. from Harvard and several years of practice at New York law firms, Stephanie is also a trained historian with a PhD from the University of Virginia, which means that we share an alma mater and a dissertation advisor. Her thesis was on a fine historical tax topic, "Money, Sex and Tax Politics: Developments in Tax Avoidance and Joint Filing 1913 to 1948."

David D. Stewart: Well, what sort of issues did you get into in your discussion?

Joseph J. Thorndike: Well, I tried to tempt her into some tax history discussions, but for the most part we talked about one of her non-historical pieces that you've alluded to, a recent article for Tax Notes Federal entitled, "Prison Work is Taxing and Should Be Taxed."

David D. Stewart: All right, let's go to that interview.

Joseph J. Thorndike: Stephanie, it's great to have you.

Stephanie Hunter McMahon: Thank you, Joe. It's great to be here.

Joseph J. Thorndike: So let's just start off by asking how did you get to this topic? This isn't the first article you've done on the general subject of prisoners in taxation, is that right? So how did you come to it?

Stephanie Hunter McMahon: Well, I created a class at University of Cincinnati called "Tax Through Film," and it's trying to introduce students to issues in taxation very broadly— everything from the sales tax to international taxation, tax exempts, business tax. And in that course, one day we watched "Shawshank Redemption" and discussed whether the activities should be treated as making Andy Dufresne a independent contractor or an employee. How should the warden be treated?

And at the end we were able to then discuss how, "Well, it doesn't matter how we think the inmate should be treated because the tax system has carved his labor out of most forms of benefit systems." So for example, he would never qualify for social security through his inmate labor. And after having discussed that with students, and at Cincinnati, we have a very active innocence project, I decided that this is something I wanted to do a little more research in and discuss in particular the racial impact of the exclusion of the social safety net from inmate labor, but also just more generally about how this is a problem that could be and should be solved.

Joseph J. Thorndike: I'm a little curious how your students came down on this. There are tax issues in play and then there are other issues in play, sort of non-tax, social and political issues. Just out of curiosity, how did your students— what was their initial take on it?

Stephanie Hunter McMahon: Most of them were just frustrated and surprised that labor that's still work in the regular ordinary sense was not treated as labor for purposes of Medicare or Social Security. And I would say despite Cincinnati as a city being a relatively conservative community, there was strong feeling that this was an unjust result.

And the students and I had long conversations, as I have after every article I've written, that concentrating on the tax treatment is not going to solve big societal issues with respect to mass incarceration or discriminatory policing, but it is a potential for solving one type of injustice in the system.

Joseph J. Thorndike: Yeah, no, that makes sense to me, and we can come back to that in a little bit too, because I like that issue of how tax engages these other things.

All right. So then the central issue that you're getting at in this article as I understand it, is that prison work, the work by prisoners, is excluded from aspects or parts of the social safety net programs of the social safety net that we all take for granted, things like Social Security or Medicare, by statute, is that right? Or is it— I mean, exactly how are they excluded and how would you fix this problem?

Stephanie Hunter McMahon: The fundamental issue is they were excluded by statute in all of the fundamental statutes. So for unemployment insurance, for Social Security, Medicare, the income tax benefits like the earned income tax credit or the child tax credit, there is a specific exclusion for inmate labor that quite frankly, you could address the problem, in part, by eliminating that exclusion. So deleting a subparagraph in three or four places could start fixing the problem.

But the second problem is there's different types of inmate labor and inmate labor can go from everything of uncompensated labor for prisons where it is a requirement that they work and they may work long numbers of hours.

So for example, the situation where someone's working in the cafeteria and they're there most of the day or doing cleaning, whatever they're doing, they may not be paid at all, all the way to private employers using inmate labor for their production. And under the system, when private employers hire them directly, they have to be paid the market wage.

So you have this wide extreme of what they may get paid. If they're only getting paid pennies for an hour, they'll still never qualify for benefits. So there's the two-prong problem. One, you need to get rid of the statutory exclusions, but two, we have to address the issue of the pay scale for inmate labor.

Joseph J. Thorndike: So let me ask you this, just to challenge you a little bit on this, does it make sense to try to address all these different kinds of inmate labor? I mean, it seems pretty clear that when you're hiring inmates out to private companies, that that might deserve treatment that is akin to any kind of private sector labor. But does it make sense to try to be changing the treatment of inmate labor that is the variety of sweeping up inside the prison, are these really the same thing or are they apples and oranges?

Stephanie Hunter McMahon: Well, it's all on a spectrum. So it seems pretty clear to me that when there's a private employer, all labor is the same and that someone's putting forth the effort in producing a good or service.

There's, at times, where prisons run their own industries and produce their own goods, which I would argue is much more similar to the private employer, it just happens to be that prison has become the producer. But even when you're in the prison and someone's providing a service that has to be provided, such as cafeteria work or janitorial staff, that work is work that would otherwise be paid to someone who would receive these benefits.

I do agree there's that potential. I've spoken with someone from the Prison Policy Initiative about how there's some employment inside of prisons, which is just make-work. And I do agree that when it's a job that's created for non-productive reasons, I think there's going to need to be lines drawn, but if it's productive labor, I think it should be treated the same.

Joseph J. Thorndike: Yeah. Well, and it raises interesting questions about what kind of work counts as work, which is a much broader question that we historians certainly have engaged over time and that the tax system has treated differently over time that, certain kinds of labor really are treated like labor and certain kinds of labor just aren't.

And in general, what you're saying is that prison labor just isn't really treated like labor ever, and that at least most of it, that's probably fair to say, the vast majority of it, some large percentage of it should be treated like labor is your point.

Stephanie Hunter McMahon: I think a very large percentage. The default should be that it is treated as labor, whereas since at least the 1950s, it's all been excluded.

Joseph J. Thorndike: Right, OK. And so you can change a lot of this by changing the statutory exclusions, and then we run into the next part of the problem that you said that a lot of these workers don't make enough money to qualify for all of these programs based on what they're earning. And how do we fix that again?

Stephanie Hunter McMahon: So that's the difficult issue. There's lobbyists in various states that are trying to eliminate what is seen, in my mind, justly as slave labor, when you're requiring people to work and paying them nothing. In about five or six states, there's no payment whatsoever and other states, they're paying them pennies on the dollar or pennies per hour.

So one, there's the potential that the lobbyists will secure for inmate labor a minimum wage. If not, there's the possibility of creating a different type of measure for labor that's allowed to be less than minimum wage.
So similar to situations— there's the one situation where there are members of religious orders who've taken vows of poverty, they don't have to get paid because they're not getting paid, but there's an ability to value what they've done to allow them to earn towards Social Security.

So I think there needs to be that type of system in the meantime before or if we ever move to a minimum wage for inmate labor.

Joseph J. Thorndike: OK. Are there any, and I really have no idea what the answer to this question is, it's not like a leading question, are there implications outside of prisons for that kind of a change, that if we start coming up with different standards for qualification? Is that going to affect anybody other than prisoners? I don't really know. Do you?

Stephanie Hunter McMahon: Not definitively. So as a professor, I'm working with a lot of students who are very interested at this moment about athletes and student athletes and what's the result going to be for them as they are able to get into employment.

And so, as you ask the question, my first thought was our students, would they be able to qualify? And then would there be some situation where they would be classified as employees? I think that there may be ramifications outside of the prison context that I just haven't thought about, but I think it's a risk that we need to take, that there's always the potential.

Joseph J. Thorndike: For sure. And honestly, my gut is that is maybe that's not such a bad thing. One could imagine other circumstances where you would want to have other ways of qualifying. And the one you use, the religious orders with vows of poverty seems like an obvious but pretty small niche example. But there must be others. And anyway, I think it's an interesting question to just sort of mull over.

Stephanie Hunter McMahon: And right now they're saying about 90 percent of the American labor force is covered by Social Security. And I think it's questionable. Why is that remaining 10 percent not covered? And I would lean towards inclusion rather than exclusion.

Joseph J. Thorndike: OK. Let's return to something you said just a minute ago. You used the phrase "slave labor," and I was going to say that it is true that some people characterize prison work as a form of modern day slavery. And I think I know how you feel about using the word in this context, but how do you?

I mean, what I was really struck by, and I guess I knew this but I had forgotten it, how many prisons in the south used to be actually old slave plantations, which is just too, not ironic, but just too illuminating for words, right? Do you feel like the word is really appropriate in this context?

Stephanie Hunter McMahon: Yes, and the reason I think it is extremely apt is inmates are often required by law to work and can be subject to severe punishment, including being denied any form of privileges, to being put in isolation if they fail to work.

And in any other context, the American population, I believe, would be very loud in their condemnation of that requirement. Simply because someone has been incarcerated, I don't think that means they have agreed, or even the justice system has agreed, to impose those types of punishments on inmates.

Joseph J. Thorndike: Right. Which is what makes me think that this is one of those really interesting places where tax is illuminating some things in the non-tax world, sort of putting them into stark relief. And it provides sort of an entry into broader discussions about non-tax issues like the breadth and the character of the carceral state in America.

So I'm wondering if the treatment of prison labor tells us anything new or important or alarming about the carceral state? Maybe this tax treatment issue is maybe not a big stakes issue in and of itself, but if it's maybe telling us something, if it's a way in to an issue that is obviously a big issue in this country.

Stephanie Hunter McMahon: I think it should. So one article I wrote was looking at unemployment, and unemployment compensation may not seem like such a big deal, but when you think that the average compensation of someone who's been released from prison, often working while in prison, once they leave their average income for the next year is $10,000. That's not a sufficient wage for someone and we need to recognize an obligation to help people transition into a better, more productive life.

Joseph J. Thorndike: Right. So this is really engaging that sort of old debate about is prison about punishment or is it about rehabilitation? And I think you're really putting the spotlight on, "Hey, if we're holding up any pretense of rehabilitation here, then this is an important part of that."

Am I reading you correctly here that if we're going to try to seriously rehabilitate prisoners and prepare them for release, they have to be a part of this social safety net system that we've constructed for everybody else, is that right?

Stephanie Hunter McMahon: I completely agree. Of course. And I would even go further. It's not even just the inmates. Additionally, many of these benefits have dependent benefits that their dependents cannot qualify for because their work is not qualifying.

So it's not simply an issue for the inmate, for which I think we do need to give serious consideration, but also for their larger communities and their families and what we have said about the obligation to help those who are coming from really difficult backgrounds to begin with. How do we help the inmates and everyone who's connected to them?

Joseph J. Thorndike: One thing that struck me while I was reading this is also what this can also tell us a little bit about tax, something sort of counterintuitive about tax. So we tend to think of paying taxes as a burden, as something unpleasant that we don't like and in some ways as like a punishment, or at least as something we have to tolerate.

But here's a moment where the punishment is to be excluded from paying the tax, which tells us a lot about this sort of "modern hidden welfare state," to use Christopher Howard's phrase from years ago, that we've constructed in the last, I don't know, 75 years now, where the only tax that people are really willing to pay ever with any degree of tolerance, really, is Social Security because it's bound so tightly to the benefits program that it's associated with.

And so here, it's one of these rare moments where excluding someone from the tax is a punishment because it excludes them from this new system, this American, this distinctly sort of American system of welfare. And I just want to sort get your reaction to that, that I don't know of any other place where being told you can't pay a tax is really a punishment, like a terrible punishment in some cases. I mean, is that a fair assessment?

Stephanie Hunter McMahon: Yes. It's one of the things because America has made the decision to link almost all forms of our social safety net to employment, it means you really need to pay the taxes and be associated with employment, that just working is not enough, you have to be recognized as working through the tax system to get any of the benefits.

Joseph J. Thorndike: Yeah. And so, thinking back to what your bio says that you're interested in is public perceptions of taxation, this is just one of those strange moments where we think Americans hate paying taxes, but this is the tax they don't really hate paying so much.

Stephanie Hunter McMahon: I've been talking to people at the ACLU (American Civil Liberties Union) who have just completed a report and they were surprised because in all of their conversations with inmates, not often, if ever, do they complain about not paying these taxes. And I think it's possibly even more of a sign of the lack of education we have in America about the importance of the tax as an ability to earn towards the benefits, that I think that we need more education about what it means to have the ability to in the future claim the social safety net.

Joseph J. Thorndike: Yeah. My sense is that people have an understanding that the payroll tax pays for social security, but they don't know that there's really any kind of a formula or a threshold or anything that ties what they make to what they take home. I think that understanding is very vague, maybe nonexistent for most people. So they don't worry, "Oh, I might not qualify. Oh, I might not earn that much, so I won't get a very big check." I don't think that most people would get to that point.

Stephanie Hunter McMahon: I agree. I found that as teaching tax policy, the students are always surprised about the types of requirements.

Joseph J. Thorndike: Yeah. Well, that was my experience in teaching the same thing in tax policy. It struck me as I was reading this that the old Stephanie historian, maybe labor historian, not that you were a labor historian, but there's a labor historian lurking inside this paper because you really do have a labor theory of value that's lurking inside this paper all the way through. A little earlier in our conversation here, you said "all labor is the same," which is very close to that concept that the value of anything is determined by the amount of labor that goes into it.

And that comes very close to, I think, what you're trying to say here. How about that becomes a way through the political problem here? So the political problem it seems to me is that Americans think that prisoners are prisoners first and workers second, if even that, but if you can make people think that prison workers are workers first and then prisoners second, at least while they're working, that you might be able to do something about prison labor reform. If you can put front and center the labor part of this, maybe that's a way over the hurdle here of the fact that Americans just want to lock everybody up all the time.

Stephanie Hunter McMahon: That has been my hope, and I'm not sure if it's even then really politically possible in the short term, but there does seem like a natural coalition among all workers on this issue that you have inmate labor potentially being able to undercut non-inmate labor because there's no employment taxes associated with hiring an inmate laborer. And at the same time, I think there's some sympathy among the workers for the need to be able to have benefits after retirement, if not before. So I'm hopeful that there is a coalition that can be forged to address this narrow problem with our system.

Joseph J. Thorndike: Yeah. I mean, it's been trendy for a long time to say that labor is on its heels in America, and that's probably because for a long time organized labor really has been on its heels in America. But I think that work is different than organized labor, I mean, politically, at least, that there's a valence to the concept of work that has broader appeal. I mean, there's a reason why politicians from both parties are out there saying like, "Hey, my constituents are the kind of people who work for a living," and that resonates with people.

And I wonder if there isn't a way to capitalize on that, the value of work concept, the value of hard work concept, that would make this a more palatable issue, because it does seem like you got quite a heavy political lift here given what seems to be enduring support for "tough on crime" politics in this country. I don't know, I mean, it seems to me like your best hope.

Stephanie Hunter McMahon: I think it's the best hope. I think it also, if nothing else, for those who truly do not care and just want to punish inmates, at a certain point I would actually advocate, "I want to tax them. I want to tax them so they can get benefits later." But I think that part of it is, "Hey, look, I want to treat the labor the same across the board," so that the obligations that someone who's working every day is going to earn to the same benefits and pay the same tax.

Joseph J. Thorndike: Right. That's sort of an equal treatment sort of argument. That seems like it could resonate as well. And that's why, again, this is one of those interesting moments where you have, as you've said a number of times, it's sort of a small tax issue, it's not going to raise much money and as tax issues go, this is minor, but it's illuminating these really big issues about a non-tax problem, a non-tax issue, set of issues, and tax can open the door to that.

And that seems really interesting to me and that's one of the aspects about tax that people in the non-tax world don't get, right? They think that taxes are April 15 and it's really boring and tedious, but we know, and all the people listening to our podcast know, that taxes engage in everything in a society and here. And just this is what was so great about your article, really just opened my eyes to an issue I really did not know anything about, is where tax is opening the door to these carceral state issues, which are just unnoticed by a lot of people. But here's a way in, here's a way to talk about it, here's a way to talk about what's going on and how we treat prisoners. And I found that fascinating and I was incredibly grateful to you for teaching me so much in this article.

Stephanie Hunter McMahon: Well, thank you. It was both difficult to write because I find it to be an emotionally challenging topic and something where I've tried to write in such a way that would have the greatest political appeal for trying to accomplish real change.

Joseph J. Thorndike: Yeah, that makes sense to me. All right. Well, thanks very much, Stephanie. It was great to have you.

Stephanie Hunter McMahon: Thank you very much for having me.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Kevin Cunningham examines the Biden administration's proposal to expand access to retroactive qualified electing fund elections. Claire Nash recommends changes to Social Security that would provide reasonable insurance for future retirees and restrain future costs.

In Tax Notes State, Tony Santiago analyzes how EY's plan to split its audit and consulting functions may affect the flow of talent in the U.S. tax profession. Billy Hamilton examines a recent court case concerning Pittsburgh's sports facility usage fee and its application to professional athletes.

In Tax Notes International, Robert van Brederode questions whether auditor independence keeps accounting firms from also providing tax and consulting services. Jack Bernstein and Megan Lambert examine proposed changes to Canada's general anti-avoidance rule.

And finally, in Featured Analysis, Ryan Finley explains that the depiction of the comparable profits method as flawed and appropriate only as a last resort is based in part on a far-fetched interpretation of section 482.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.