45 Pages Posted: 29 Jan 2016 Last revised: 18 Feb 2017
Date Written: December 5, 2016
Information asymmetry between the government and taxpayers is a fundamental challenge of the income tax. This article complicates the consensus view that elective provisions in the tax law are necessary evils by proposing a novel account of statute-based tax choices (“tax elections”) as informational screens. To illustrate the mechanics of screening, this article describes a fictional tax election that perfectly separates taxpayers of one type (honest compliers) from taxpayers of the second type (dishonest evaders). Building on this illustration, the author applies the theory of screening to the most common tax election in the United States tax context: the election to itemize one’s tax-deductible expenses. A taxpayer’s choice to itemize can help reveal important taxpayer attributes, particularly when analyzed alongside other available tax return data. These attributes include the taxpayer’s earning ability, responsiveness to taxes and propensity to voluntarily comply with the tax law. However, screening benefits are not blanket justifications for the use of tax elections. The article concludes by contextualizing the screening account within a broader cost-benefit approach to evaluating tax elections. Screening benefits must be estimated and weighed against the complexity costs of offering a particular election. In addition, the policy and distributional objectives accomplished or offended by the election must also be taken into account. Even if many status quo tax elections might not survive this broader cost-benefit scrutiny, screening offers a previously unrecognized silver lining. With screening, the government can harvest distribution-neutral efficiency gains from our current (imperfect) system.
Keywords: Tax law, tax elections, default rules, law and economics
JEL Classification: K34, K00
Suggested Citation: Suggested Citation
Satterthwaite, Emily, Tax Elections as Screens (December 5, 2016). 42:1 Queen's Law Journal 63 (2016). Available at SSRN: https://ssrn.com/abstract=2724001