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Of Coase, Calabresi, and Optimal Tax Liability


Kyle D. Logue


University of Michigan Law School

Joel B. Slemrod


University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

January 30, 2009

U of Michigan Law & Economics, Olin Working Paper No. 09-004

Abstract:     
The Coase Theorem and the vast literature it inspired explore two basic questions: to whom should responsibility for external harms be assigned and how will that assignment matter. Building on the Coasean insight in the torts context, Guido Calabresi observed that the assignment of tort liability can indeed matter from an efficiency perspective and should, under certain assumptions, be assigned to the "cheapest cost avoider." This article applies a similar Coasean/Calabresian framework to a related (though not identical) set of questions in the tax context: To whom should the responsibility for remitting taxes be assigned and when and how will that assignment matter? Following Calabresi's canonical formulation for the design of an optimal tort system, we conclude that an optimal tax remittance regime requires that tax liabilities be assigned so as to minimize the overall social costs of compliance and administration for a given level of achievement of the tax law's desired distributional and revenue goals. This will sometimes mean assigning tax remittance responsibility to the lowest-compliance-cost remitter, and other times not - if that party happens also to be the lowest-cost liability avoider (the party best able to evade the tax).

This comparison of tax remittance responsibility and tort remittance responsibility produces a number of positive and normative insights. For example, it helps to explain why the remittance responsibility for the retail sales tax lies primarily with the sellers rather than the buyers, as well as why we have wage withholding for the income tax. And it helps to explain some existing types of non-wage withholding, such as withholding on payments to foreign taxpayers. This framework also supports a number of reforms in the current U.S. regime for tax enforcement such as expanding the withholding requirement to payments made to independent contractors, which are a type of payment that currently contributes significantly to the overall U.S. federal tax gap.

Number of Pages in PDF File: 58

Keywords: Coase Theorem, optimal tort system

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Date posted: January 31, 2009 ; Last revised: March 23, 2009

Suggested Citation

Logue, Kyle D. and Slemrod, Joel B., Of Coase, Calabresi, and Optimal Tax Liability (January 30, 2009). U of Michigan Law & Economics, Olin Working Paper No. 09-004. Available at SSRN: http://ssrn.com/abstract=1335924 or http://dx.doi.org/10.2139/ssrn.1335924

Contact Information

Kyle D. Logue (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)
HOME PAGE: http://cgi2.www.law.umich.edu/_FacultyBioPage/facultybiopagenew.asp?ID=220

Joel B. Slemrod
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Room A2120
Ann Arbor, MI 48109-1234
United States
734-936-3914 (Phone)
734-763-4032 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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