Leigh Osofsky (Miami), Real-World Tax Screening (JOTWELL) (reviewing Emily Satterthwaite (Toronto), Tax Elections as Screens, 42 Queen’s L.J. ___ (2016)):
The concept of “screening” taxpayers is theoretically appealing. According to optimal tax theory, our tax system should impose tax liability based on ability, which is a characteristic that reflects relative well-being. However, since ability cannot be directly observed, the tax system has to rely largely on income, a presumed surrogate of ability, as a tax base. The problem is that income is easily manipulable, making the tax system an inefficient tax on ability. Screening is a potential, partial solution to this problem.
Screening involves relying on other characteristics that are more revelatory of ability. For instance, as it turns out, height is surprisingly strongly correlated with earning ability. However, as theoretically appealing as screening may be, the discussion of it is generally politically unrealistic enough, or sufficiently divorced from the realities of the actual tax system, to make it a largely academic exercise.
In Tax Elections as Screens, Emily Satterthwaite gets beyond the theoretical possibilities of screening taxpayers. She does so by examining how an existing tax election—the election to itemize deductions—can serve as a screening mechanism. By examining how screening may work in our actual tax system, Satterthwaite offers an important contribution that has few companions in what is a largely theoretical field. ...
Satterthwaite’s insights are important. First, whether optimal or not, the tax code does provide an election to itemize deductions. As a result, Satterthwaite does not need to prove that introducing itemizing as a screen is welfare enhancing. Rather, she merely needs to show that, given that the election is already in place, the election can provide the government valuable information. And she succeeds in this task. Perhaps the most useful insight is Satterthwaite’s suggestion that the government may use the failure to itemize (and the likely higher cost of itemizing) to target other assistance to the taxpayer, such as help preparing a tax return or enhanced information about government benefits that are provided through the tax code, such as the earned income tax credit. This suggestion is particularly helpful because, even without being able to determine definitively why a taxpayer failed to itemize, the government can reasonably imagine that a non-itemizing taxpayer is likely to be less well-informed or sophisticated in preparing government forms than a taxpayer who itemizes. Targeting greater assistance to the former than the latter may create welfare improvements at a low cost. Moreover, the suggestion harnesses information that can be gleaned from tax filing behavior to help improve the administration of unrelated welfare benefits that, whether rightly or wrongly, are already being provided through the tax code. This sensible, incremental improvement arises out of Satterthwaite’s real-world tax policy approach. This approach, which has much to commend it, merits more scholarly attention.