Line Drawing, Doctrine, and Efficiency in the Tax Law

Abstract

This paper examines how lines should be drawn between similar activities within the tax law. Line drawing is a pervasive and enduring problem in the tax law. For example, the tax law draws distinctions between selling and holding, debt and equity, and between independent contractors and employees. Existing scholarship does not address this line drawing problem in any comprehensive way, and traditional tax norms, such as the Haig Simons definition of income, fail in this context. This paper suggests (i) that the problem can be analyzed comprehensively by drawing lines where it is most efficient to do so; and (ii) efficiency is the appropriate method of analysis. The paper then uses optimal tax models to develop the intuitions for efficient line drawing and discusses several applications.

JEL Classification: K34