Paul L. Caron

Friday, April 19, 2019

Weekly SSRN Tax Article Review And Roundup: Speck Reviews Abramowicz & Blair-Stanek's Contractual Tax Reform

This week, Sloan Speck (Colorado) reviews a new work by Michael Abramowicz (George Washington) & Andrew Blair-Stanek (Maryland), Contractual Tax Reform, 61 Wm. & Mary L. Rev. ___ (2019).

Speck (2017)In Contractual Tax Reform, Michael Abramowicz and Andrew Blair-Stanek develop an innovative proposal that would allow private intermediaries to offer alternative tax regimes to subsets of taxpayers. These intermediaries would target specific taxpayers with algorithms developed using artificial intelligence, and these taxpayers then would be able to opt into the particular alternative tax regime offered by the intermediary. The catch is that the overall tax revenue from the intermediary’s customers can’t be less than they would pay, in the aggregate, under the regular tax system. Assuming that internalities aren’t material, this arrangement is Pareto efficient: only taxpayers who prefer the alternative tax regime would choose the intermediary, and total tax revenue would not fall. Everyone’s better off, and no one’s worse off.

After illustrating several salutary applications of contractual tax reform, Abramowicz and Blair-Stanek address a comprehensive list of implementation issues, as well as possible objections to this method of reform. Implementation appears especially challenging in its mechanics, as well as in determining the ambit and emphasis of contractual tax reform. Such reform could be procedural or substantive, individual or corporate, short-term or persistent, modest or dynamic, or some combination of each of these elements. The authors do admirable work in clarifying the stakes and options at play, as well as what distinguishes their proposal from past efforts at tax privatization in the United States. The history isn’t terribly favorable (for example, the IRS’s use of private collection agencies), and perhaps a clean(er) break is needed. Abramowicz and Blair-Stanek allude to the possibility of today’s electronic tax preparers becoming tomorrow’s intermediaries in contractual tax reform. At the end of the day, I’m less sure that I trust H&R Block to be a good actor in ad hoc tax reform.

The promise of contractual tax reform, from Abramowicz and Blair-Stanek’s perspective, is linked to its power to elicit private information from taxpayers voluntarily, within a framework that leaves both individuals and the polity better off. In this sense, contractual tax reform solves a problem of known unknowns from the government’s perspective. By leveraging AI in the creation of alternative tax regimes, however, Abramowicz and Blair-Stanek introduce the possibility that intermediaries may facilitate the personal revelation of unknown unknowns—things that people don’t know that they don’t know about themselves. For example, a letter in the mail (or an Internet banner ad?) might announce one’s eligibility for an alternative tax regime that subsidizes creative writing, in turn awakening the dormant novelist in one’s soul. These revelations surely won’t always be sanguine, but they may be valuable beyond their revenue consequences. Many have noted the personal growth—or something—that comes with a tax system predicated on self-reporting; under Abramowicz and Blair-Stanek’s proposal, this growth might move in new and unexpected directions.

Abramowicz and Blair-Stanek correctly identify privacy considerations as a serious issue in contractual tax reform, though one that they largely cabin as outside the scope of their article. And individuals indeed seem to have few qualms about handing their sensitive personal data to a private company for tax purposes—compare the number of TurboTax filers to those who fill out their 1040s by hand. But a related concern is whether the customers in contractual tax reform actually will end up becoming the product. While private tax intermediaries may be limited in what information they can disclose about specific taxpayers, it doesn’t seem unreasonable that such intermediaries would be allowed to use data in a form that cannot be associated with particular taxpayers. In addition, intermediaries might ask their customers to waive protections for certain items of demographic or other information that don’t directly figure into tax liability. One might expect that, in short order, some enterprising entrepreneur will monetize these data with venture capital backing (the Facebook of tax!), which raises significant questions about similar to the private sector we really want our tax system to be.

According to Abramowicz and Blair-Stanek, one possible advantage to contractual tax reform is that it could encompass changes that fall outside of the Overton window of what’s politically possible at a given moment. A threshold question, however, might be WWGD: What would Grover Norquist do? Because contractual tax reform is predicated on raising overall revenue, it seems virtually certain to violate (or be treated as violating) the Taxpayer Protection Pledge signed by so many Republican lawmakers. My intuition is that support by this group is a predicate to the enactment of any form of contractual tax reform legislation, and my suspicion is that enactment would come only with a dramatic reduction in revenue—the Cuts, Cuts, Cuts, and Privatization Act. This tax cut could be through the front door, in terms of expressly lower revenue targets for private tax intermediaries, or through the back door, via leaky rules and poor governmental controls. Or both. In any event, the political process through which contractual tax reform would become law seems fraught and virtually destined to undermine many of the reasonable parameters that Abramowicz and Blair-Stanek establish for their proposal.

Overall, Abramowicz and Blair-Stanek’s article provides an engaging and provocative proposal that offers an interesting alternative to state-driven tax administration beyond the simple outsourcing of specific functions. Policymakers on the left and the right, as well as academics of various stripes, should find their analysis helpful and refreshing in thinking through tax policy issues.

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

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