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Tuesday, July 1, 2014

Gamage: A Way Forward for Tax Law and Economics?

David Gamage (UC-Berkeley), A Way Forward for Tax Law and Economics? A Response to Osofsky's Frictions, Screening, and Tax Law Design, 61 Buff. L. Rev. 189 (2014):

This Essay responds to Leigh Osofsky's Who’s Naughty and Who’s Nice? Frictions, Screening, and Tax Law Design. Osofsky’s analysis suggests that tax rules might be designed so as to take account both of heterogeneity in taxpayers’ tax planning proclivities and of taxpayer characteristics relevant for distribution. By designing tax rules so as to create frictions that differentially impose higher costs on those taxpayers who are more successfully circumventing existing taxes we can perhaps reform our tax system so as to better achieve equitable distribution at lower efficiency costs. This Essay argues that Osofsky's analysis is generally correct and that it potentially suggests a path toward a more useful law and economics analysis of detailed tax rules.

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The original Osofsky analysis is creative but blinkered. It implicitly posits wise, impartial lawmakers drafting tax laws for maximum economic efficiency. That's simply ridiculous.

Osofsky explains that "frictions" such as added uncertainty can dissuade taxpayers from tax avoidance. Wise lawmakers can insert those frictions into tax law and reduce the deadweight loss caused by tax avoidance.

Osofsky's article has not one word about the deadweight loss caused by tax legislation as it is actually practiced. Politicians consistently tailor tax law to provide advantages to their voters, contributors, and supporters. Now _that_ is a deadweight loss that completely dwarfs anything Osofsky describes.

Speaking of "frictions" that disrupt economic activity, it's not possible to top the government's intentional gross mismatch between promised spending and available revenues. It doesn't take a genius to see that some sort of major trouble is coming, perhaps even a crash. Only a Nobel Prize winning economist could deny it. Nobody knows how the fiscal imbalance will be resolved. Therefore nobody can protect himself from the biggest economic storm any of us have ever seen. That's a "Friction" with a capital F.

To me, the Osofsky article has the flavor of a technically flawless review of the play at the Ford Theater.

Posted by: AMT buff | Jul 1, 2014 9:00:59 PM