Paul L. Caron

Friday, April 17, 2020

Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Cauble's Time For A Tax Return Filing Fee

This week, David Elkins (Netanya, visiting Cornell spring 2020) reviews a recently posted work by Emily Cauble (DePaul), Time for a Tax Return Filing Fee, 57 Harv. J. on Legis. ___ (2020):

Elkins (2018)

Not all tax returns are created equal. They vary with regard to their complexity and, consequently, with regard to the amount of time that the IRS needs to devote to them on audit. In this week’s article, Professor Emily Cauble proposes imposing upon filers a fee that would reflect the complexity of the transactions reported. She argues that such a fee would make the system fairer, would raise revenue to cover the cost of auditing the return, and would improve efficiency by encouraging taxpayers to take into account the cost imposed on the tax administration by their complex transactions. Her proposal includes a carve-out for difficult-to-audit items, such as the EITC, that are disproportionately claimed by lower-income individual.

The proposal is intriguing and I freely admit that despite having gone over it several times, I am little closer to forming a definitive position. In this review, I will take the liberty of expressing some of my reservations. I will state at the outset that they are nothing other than starting points for a discussion about it.

Although the article does not describe it in these terms, the proposal is conceptually Pigouvian, as attested to both by the justification of the filing fee and by its stated goals. The purpose of a Pigouvian tax is to encourage economic efficiency by forcing market actors to factor into their decision-making process the negative externalities of their behavior and to prevent the unjust enrichment of some at the expense of others. The stress on efficiency and fairness in the stated goals of the proposed filing fee are entirely consistent with Pigouvian analysis.

Such being the case, one might question whether the carve-out for difficult-to-audit items disproportionately claimed by lower-income individuals is justified. In general, vertical equity is not a relevant criterion in the design of a Pigouvian tax. Discouraging behavior that lowers aggregate welfare (measured by whichever social welfare function one chooses) is appropriate regardless of the identity of the actor. From the perspective of horizontal equity, it seems unfair that lower-income individuals who do not include difficult-to-audit items on their return should effectively have to bear the cost imposed on the administration by those who do. Of course, one might posit that, whatever its theoretical imperfection, the carve-out would be necessary because without it the proposal would not be politically viable. Interestingly, the article seems to argue just the opposite (“because the proposal is limited so that the tax return filing fee would not be levied on items disproportionately claimed by lower income individuals, it might encourage greater resistance than some gap closing proposals”). In any case, it seems that the proposed carve-out perhaps requires more of a justification than a simple reference to regressivity.

Another point concerns the definition of complexity, a term that stands at the heart of the filing fee proposal. The article seems to equate complexity with uncertainty regarding the tax consequences of a transaction. For instance, it proposes that, at least as a starting point, the fee could be imposed based upon the number of items listed in Schedule UTP (“uncertain tax positions”). However, the complexity of a transactions is not necessarily related to the uncertainty of its tax consequences. A relatively simple transaction could have indeterminable tax consequences, while the tax consequences of a transaction whose extraordinarily complexity derives entirely from business exigency, could be fairly straightforward (once one understands what actually happened). Under the proposal, which of the two would incur the greater filing fee? If it is the former – as the reliance upon Schedule UTP would seem to attest – this could indicate that, despite its protestation to the contrary, the purpose of the proposed filing fee is not actually to force taxpayers to bear the administrative cost of auditing their returns, but rather to discourage tax planning. If so, then the stated justifications and goals may not be apt.

Perhaps the most serious theoretical issue with the proposed filing fee – and one that could ferment political opposition as well – is the credible claim that the administrative cost of auditing complex transactions derives to a great extent from the inconsistencies inherent in the Code itself (and in this context, “the Code” includes regulations, administrative positions and procedures, judicial gloss, and so forth). If all essentially equivalent transactions were taxed essentially the same, the incentive to engage in complex transactions to obtain preferred tax treatment would be reduced or eliminated. I have argued elsewhere that the provisions such as the business purpose test often serve as a cover for Congress’ inability or unwillingness to enact a more consistent set of tax rules. Could not the same be said for the proposed filing fee?

As I noted earlier, I offer these remarks as nothing more than what they are: some of the thoughts that came to mind as I read the article. Perhaps they will encourage a dialogue (with the author and the larger academic community) not only with regard to the specific proposal but also with regard to some of the larger issues that it raises.

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

David Elkins, Tax, Tax Scholarship, Weekly SSRN Roundup, Weekly Tax Roundup | Permalink


Are you trying to make people hate the IRS more? Charging them an "audit tax" on top of their tax liability smacks of charging them for breathing.

Posted by: Smitty | Apr 17, 2020 1:17:04 PM