Wednesday, April 11, 2007
Leandra Lederman (Indiana) has posted Statutory Speed Bumps: The Roles Third Parties Play in Tax Compliance, 60 Stan. L. Rev. ___ (2007), on SSRN. Here is the abstract:
Recent legal and economic scholarship has recognized that the government can use “structural” systems as an efficient way to reduce prohibited behavior. For example, speed bumps help reduce violations of posted speed limits without government monitoring of speeders. The federal tax system also uses structural mechanisms, such as withholding taxes, to foster compliance. However, unlike speed bumps, withholding relies on third parties to the taxpayer/government relationship.
The use of structural systems to reduce tax evasion need not be limited to tax administration. The article argues that substantive federal income tax law can—and in many contexts does—foster compliance by making use of the structural incentives of third parties. Although this phenomenon has gone largely unnoticed, third parties are routinely used by the tax system to verify the bona fides of taxpayer claims in diverse contexts involving reimbursed amounts and other receipts.
Given the importance to tax policy that a tax be enforceable, it is neither troubling nor likely accidental that although many items that implicitly have been vouched for by a third party are excludible, the deduction of comparable but unverified amounts, such as unreimbursed employee business expenses, is restricted. Yet, third parties do not always behave in ways that are helpful for tax enforcement. They certainly can facilitate tax avoidance or evasion, as the corporate tax shelter phenomenon has shown. The article therefore identifies contexts in which a third party will have an incentive to collude with the taxpayer rather than acting at arm's length. The article argues that these contexts are ones that the government needs to scrutinize closely and, in certain cases, obstruct with legislation. By contrast, the government can afford to free ride on the incentives of third parties in contexts in which the transfer of funds from a third party to the taxpayer is a zero-sum game.
Leandra blogs about the article on Conglomerate: Administrability Matters in the Federal Income Tax.