O'Reilly: Principles of Efficient Tax Law: Apocrypha

Terrance O'Reilly (Willamette) has published Principles of Efficient Tax Law: Apocrypha, 27 Va. Tax Rev. 583 (2008). Here is the abstract:

In this paper, I examine guidelines that legal scholars have suggested for evaluating tax law in terms of economic efficiency. A common theme is that the efficiency of the tax treatment of a transaction is related to an elasticity or elasticities of some sort. Daniel Shaviro considers realization in terms of efficiency. Shaviro suggests that efficiency is promoted by "taxing more lightly the consequences of decisions that are tax-elastic." In separate articles, David Weisbach and Deborah Schenk each proposes evaluating certain tax policies on the basis of the policy's effect on the elasticity of taxable income. In other work, David Weisbach concludes that the determination whether a good is excluded from the tax base should be based on the principle that goods should be taxed like their close substitutes. Weisbach establishes this principle for a case in which lump-sum taxation is feasible and conjectures that the rule essentially applies to other means of offsetting the revenue effects of changing the tax base, such as adjusting income tax rates.

I conclude that these proposed guidelines are unsatisfactory: Economic theory generally does not support determining the efficiency of tax policy based on elasticities. This paper also notes an important qualification to a result by Louis Kaplow and Steven Shavell about the advantages of redistribution using an income tax over redistribution via legal rules: their result does not follow unless the income tax base is comprehensive. Yet some economists estimate that over a third of consumption is excluded from the tax base.