Crane Reviews The Relationship Between Legal Rules And Tax Systems By Weisbach & Hemel

Charlotte Crane (Northwestern; Google Scholar), Identifying and Exploiting the Relationship between Legal Rules and Tax Systems (JOTWELL) (reviewing David Weisbach (Chicago; Google Scholar) & Daniel Hemel (NYU; Google Scholar), The Legal Envelope Theorem, 102  B.U. L. Rev. 449 (2022)):

The recent work of David Weisbach and Daniel Hemel, including The Legal Envelope Theorem, engages with traditional questions about tax systems in important new ways. Legal tax scholarship has long explored the interactions between tax law and taxpayer behavior and has often used intuitions from economics in doing so. But only haphazardly has this work touched on the effects of nontax institutions on the functioning of tax systems. The Legal Envelope Theorem looks at these interactions in very deliberate ways.

At the risk of oversimplifying, Weisbach and Hemel’s thesis is that changes in non-tax legal  rules and institutions that at first might appear to be undesirable can be desirable when their effects on tax systems are taken into account. More precisely, a nontax change that makes almost no change in overall well-being can make a significant after-tax increase in overall well-being if the non-tax change increases taxable income, increases collection of taxes, or increases potential for redistribution.

For instance, imagine a nontax rule change that increases the likelihood that an individual will participate in a market transaction that produces taxable income rather than in a nonmarket or otherwise untaxed activity. It is entirely possible that the overall benefit to society created by the additional taxable income will be greater than the small detriment to the individual whose behavior is affected. ...

Weisbach and Hemel have made a significant contribution merely by identifying these interactions between non-tax rules and tax systems. Their additional analysis in this article shows that these interactions can produce desirable results, and that changes in legal rules should be made (and may in the past have been made) deliberately to enhance the operation of tax systems, since such changes can involve a trade-off between a small non-tax cost and a large increase in tax revenue as a result of indirect enhancements in the operation of the tax system. There is a lot more to do for those interested in working through the theoretical economic insights on which this analysis rests, including the relationship between the Legal Envelope Theorem and the more general Envelope Theorem of microeconomics. Some of this work is also outlined in greater detail in other papers, including The Behaviorial Elasticity of Tax Revenue, 13 J. Legal Analysis 381 (2021), and, with Jennifer Nou, Appendix to “The Marginal Revenue Rule in Cost-Benefit Analysis.”