Thinking Outside the Little Boxes

24 Pages Posted: 26 Mar 2002

See all articles by David A. Weisbach

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Date Written: March 2002


Herwig Schlunk, in his paper "Little Boxes: Can Optimal Commodity Tax Methodology Save the Debt-Equity Distinction?" argues that the theory for line drawing in the tax law developed in several of my prior articles is flawed. In particular, Schlunk argues that the method is path dependent and, therefore, arbitrary. Moreover, he argues that it will be defeated by taxpayer manipulation, such the use of arbitrage or hybrid positions.

This article responds to Schlunk's paper. I show here that the line drawing methodology is not path dependent in any unique way. Schlunk's argument relies on an unjustified assumption that prior line drawing decisions in the tax law will not be revisited when new information become available. Without this assumption, his claim fails. Moreover, if decisions cannot be revisited, line drawing theory would not become arbitrary, contrary to Schlunk's claim. Instead, line drawing decisions would have an option element that would have to be priced in the decisions.

Keywords: Commodity tax, debt-equity, tax law, tax methodology, Schlunk

Suggested Citation

Weisbach, David, Thinking Outside the Little Boxes (March 2002). Texas Law Review, Vol. 80, 2001. Available at SSRN: or

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

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Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

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