TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, May 18, 2018

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Cauble's Superficial Proxies For Simplicity In Tax Law

This week, Mirit Eyal-Cohen (Alabama) reviews a new article by Emily Cauble (DePaul), Superficial Proxies for Simplicity in Tax Law:

Mirit-Cohen (2018)In her article, Cauble reminds us that tax laws are always a popular target for political rhetoric. She aims in this Article to derail the public discourse about the concept of tax simplification by highlighting the dangers of focusing solely on numeric metrics relating to volume in order to describe complexity. We often hear unsophisticated, superficial proxies of tax complexity such as word counts, page counts, number of regulations, and other metrics. For example, there is much commentary that points to the length of IRS publications or tax forms instructions as evidence of the intricate nature of tax law. According to Cauble, these often leave the public susceptible to policies under the appearance of simplification while their real purpose is much more than that. They enable politicians to advance provisions under the guise of achieving simplicity – a prospect with broad appeal - when the true effect of the proposal is something that would be much less popular. She exemplifies with the latest tax legislation that while the rhetoric around the proposal to remove some tax brackets may have portrayed it as a simplification move, in her opinion its real goal was to reduce progressivity. 

Another illustration is the call to reduce the tax-writing staff of Congress and Treasury as a symbolic rather than substantive move. This obsession with numbers, in Cauble’s eyes, often leads to more complexity rather than reducing regulatory tax costs. For example, the President recently signed an executive order that requires federal agencies to eliminate two existing regulations for every one that they implement. Similar proposals were made in the past by Senate representatives. Yet, Cauble claims that genuine simplification often requires enacting more law not less. Issuing legal guidance that is shorter is not necessarily better and might in fact be more complex and increase compliance costs faced by taxpayers.

Cauble suggests that complexity affects taxpayers at three stages in time –the “planning stage” (prior to initiating a transaction when trying to determine the content of tax laws); the “compliance stage” (the time the taxpayer spends on reporting the tax consequences of a transaction that has already occurred); and the “enforcement stage” (the time when the IRS audits and potentially challenges the tax consequences claimed by the taxpayer). In each of these stages there are taxpayers who attempt to ascertain the content of tax laws and those that do not. The Article demonstrates the effect of complexity separately for these typecast taxpayers in each of these stages in time. 

Thereafter, Cauble admits that the length of applicable laws is not entirely irrelevant to an evaluation of the complexity inherent in law. Yet, she illustrates four ways in which reducing the number of words in an attempt to appear more simple adds to complexity rather than improves it. First, instead of repeating words the Code contains many cross references alongside modifications to the incorporated language. This often creates more complexity for taxpayers and future lawmakers seeking to amend the referenced statutes. At many of these cases, merely repeating the words with the proper changes would have been clearer. For example, the term “acquisition indebtedness” in Section 163 or “constructive ownership” in Section 318 are being referred to in the Code numerously with many modifications that are less readable and more difficult to follow. Second, tax provisions that are shorter could be more complex when they are counter intuitive in the sense that they do not match the tax outcome to the economic outcome. For example, while the “remedial method” of gain or loss allocation recognized by a partnership under Section 704 is more wordy, it is more intuitive than the operation of the “traditional method” of allocation. Third, in an attempt to be more succinct, the IRS might limit the length of its publications and guidance by omitting certain details, warnings and exceptions. And other scholars have noted that these efforts can potentially lead taxpayers astray by incomplete guidance. The IRS’s estimate that the amount of time required by taxpayers to complete a form will increase proportionately to the number of lines on the form or the number of words in the instructions, has been denounced by scholars as plainly wrong. Lastly, the pressure to use less words may result in the legislature remaining silent where guidance and rules might have otherwise reduced much uncertainty. As oppose to other areas of the law, in the absence of any regulation on point, the inference is not necessarily that taxpayers are free not to comply with a tax law—they just have to do it with less guidance on what the law is. Cauble properly concludes that when regulations interpret law rather than create new legal requirements, a reduction in the volume of regulations does not decrease regulatory cost borne by the taxpayer.

Some of Cauble’s suggestion to increase tax simplicity include harmonization of various numerical tests in tax law (e.g. “greater than or equal to” or “greater than” baselines), taxing all similar transactions in a similar manner to the greatest extent possible, and increasing the use of a “Ready Return” system. She claims it is imperative that we continuously examine whether or not simplification efforts fulfill their goal. We need not overlook that, while a desirable target, achieving simplicity often necessitates tradeoffs and sacrificing other aims. And since taxation touches many aspects of life, as life becomes complex inevitably so is tax law. 

Cauble’s article is important in reminding us that the optics and volume of enacted laws are not the be-all and end-all indicators of genuine complexity. Indeed, it is the content of our tax laws that matters rather than their length. Decreasing the volume of laws to achieve simplification may end up generating more complexity. Yet, in the search for the delicate balance between the two, Cauble’s observation that the rhetoric decrying legal complexity is not innocuous, for lack of a better term, is a bit “over simplistic.” Much of our rules and legislation, especially in taxation, involve strategic maneuvers, political deals, and special interest footprints. Public choice theory focuses on such influence of and relationship between special interest groups and regulators, pointing a finger not only to the former but also to latter utilizing legislation to increase their political legitimacy. This is an angle that could be further explored in the Article. As I was reading the article, I was wondering—whose interests does tax complexity serve and who is affirmatively advocating for it on the congressional floor? More so, what is the role of accountants, lawyers, and other professionals in adding complex rules and convoluted language to our tax laws?

Here’s the rest of this week’s SSRN Tax Roundup:

Scholarship, Tax, Weekly SSRN Roundup | Permalink


It would be nice to see provision in tax codes of some way to identify winners and losers for each item. We would find that women and breeders, for example, make out like bandits.

Posted by: Jimbino | May 18, 2018 11:56:55 AM

To get to the heart simplifying taxes, ask professionals who actually prepare returns for a living rather than those who write scholarly articles, but, in the end, politicians listen to neither.

Posted by: Woody | May 18, 2018 7:47:49 PM