Joshua Blank (UC-Irvine) presents Simplexity and Legal Calculators (with Leigh Osofsky (North Carolina)) at Pepperdine today as part of our Tax Policy Workshop Series hosted by Dorothy Brown and Paul Caron and funded in part by a generous gift from Scott Racine:
Automated customer service has become one of the primary ways in which consumers find answers to their questions, whether they involve airline reservations, medical insurance coverage or unresponsive home appliances. Federal and state tax authorities have increasingly begun to offer online decision-making tools that provide guidance regarding the tax law to taxpayers. Some online tools, such as the IRS’s “Withholding Calculator,” direct taxpayers to input wage information in order to receive confirmation of whether their tax withholding is adequate. More comprehensive online tools, such as the IRS’s “Interactive Tax Assistant,” ask taxpayers personal questions and then deliver answers on topics ranging from whether the taxpayer is required to file a tax return to whether the taxpayer is entitled to claim certain tax credits to whether a type of income is taxable. These online tools do not just perform mathematical calculations; rather, they attempt to calculate taxpayers’ legal consequences.
Legal calculators often embody a characteristic that can be described as “simplexity.” As we have theorized, simplexity occurs when the government presents clear and simple explanations of the law without highlighting its underlying complexity or reducing this complexity through formal legal changes. In earlier work, we argued that some elements of IRS publications (plain language summaries of the law for the general public), present contested tax law as clear tax rules, add administrative gloss to the tax law and fail to fully explain the tax law. In this paper, we show that simplexity also occurs when the government offers legal calculators to deliver guidance to taxpayers. For example, depending on the individual taxpayer’s circumstances, the IRS’s legal calculators may deliver seemingly clear and simple answers to questions such as whether gambling losses are deductible, whether self-employment tax is owed, whether education expenses are deductible and whether exceptions to penalties for early IRA retirement account distributions are triggered. We argue that legal calculators present the potential for even more pervasive and powerful forms of simplexity than static IRS publications. First, legal calculators are interactive and reciprocal: the taxpayer provides simplified inputs and, likewise, the online calculator delivers simplified answers. Second, legal calculators provide answers to taxpayers almost instantaneously, limiting their need to spend time absorbing and applying a written summary of the law. Third, as legal calculators are free and easily accessible, they reduce the incentive for taxpayers to seek advice or guidance from professional third-party advisors.
As federal and state tax administrators continue to embrace automated taxpayer guidance as a form of communication, the implications of simplexity in this context deserve attention. The primary benefit of legal calculators is that they provide clear guidance to taxpayers directly and quickly. One potential danger, however, is that they can provide the tax authority with disproportionate power to affect the taxpayer’s view of the tax law, a consequence that may especially affect the least well-off and least sophisticated taxpayers. One central design question regarding automated taxpayer guidance is what type of default rule should legal calculators adopt? After considering the potential benefits and drawbacks of simplexity in automated taxpayer guidance, we conclude that legal calculators should adopt tax positions that are favorable to the government, but tax administrators should clearly disclose this choice of default rule to taxpayers.
Update: Post-Presentation Lunch: