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Buffalo Law Review Volume 62 Number 1 The Rule of Law in Ancient Athens Article 8 1-1-2014 A Way Forward for Tax Law and Economics? A Response to Osofsky's "Frictions, Screening, and Tax Law Design" David Gamage UC Berkeley School of Law Follow this and additional works at: https://digitalcommons.law.buffalo.edu/buffalolawreview  Part of the Law and Economics Commons, and the Tax Law Commons Recommended Citation David Gamage, A Way Forward for Tax Law and Economics? A Response to Osofsky's "Frictions, Screening, and Tax Law Design", 62 Buff. L. Rev. 189 (2014). Available at: https://digitalcommons.law.buffalo.edu/buffalolawreview/vol62/iss1/8 This Response is brought to you for free and open access by the Law Journals at Digital Commons @ University at Buffalo School of Law. It has been accepted for inclusion in Buffalo Law Review by an authorized editor of Digital Commons @ University at Buffalo School of Law. For more information, please contact lawscholar@buffalo.edu.                             RESPONSE A Way Forward for Tax Law and Economics? A Response to Osofsky’s “Frictions, Screening, and Tax Law Design” DAVID GAMAGE† Meaningful law and economics analysis of detailed taxrules is notoriously difficult.1 At a high level of generality,there are expansive public finance and tax theoryliteratures that evaluate the overall structures of taxation.But scholars have had only limited success in connectingthese theoretical literatures to the study of the actual detailed rules that occupy most of the time and energy ofpracticing tax lawyers and government officials.2 Osofsky’s excellent new paper—Who’s Naughty and Who’s Nice? Frictions, Screening, and Tax Law Design— suggests a path toward a more useful law and economics analysis of detailed tax rules.3 To begin with, Osofsky’s paper makes an important contribution to the literature on tax frictions. Osofsky persuasively argues that tax frictions should be designed to incorporate screening concerns.4 As Osofsky documents, the existing literature on the design of tax frictions has focused almost exclusively on the goal of † Assistant Professor, UC Berkeley School of Law. Many thanks to the BuffaloLaw Review Editorial Staff. 1. Alex Raskolnikov, Accepting the Limits of Tax Law and Economics, 98CORNELL L. REV. 523, 529-66 (2013). 2. Id. at 557-66. 3. Leigh Osofsky, Who’s Naughty and Who’s Nice? Frictions, Screening, and Tax Law Design, 61 BUFF. L. REV. 1059 (2013). 4. Id. at 1083-1119.189                                            190 BUFFALO LAW REVIEW [Vol. 62deterring wasteful tax planning.5 The literature has thus analyzed how frictions can be designed to balance the goal of deterring wasteful tax planning against the goal of notimposing costs on regular business transactions.6 Yet thefrictions literature has not sufficiently incorporated theimplications of heterogeneity in taxpayers’ proclivity towardtax planning.7 In contrast, as Osofsky also documents, the existingliterature on screening primarily focuses on ways in which tax-system design can overcome the disincentives to work caused by taxing income.8 Traditional optimal tax theoryhas largely been concerned with the problem of taxpayers working less in response to taxation.9 Yet the recentempirical literature suggests that taxation has only small effects—if any—on reducing taxpayers’ work effort.10 Instead, the recent empirical literature suggests thattaxpayers primarily respond to taxation through a variety ofresponses that we might collectively refer to as “taxplanning” or “tax gaming.”11 Thus, as Osofsky convincinglyargues, the greatest potential for utilizing screening mechanisms in taxation is likely in regard to tax planningand tax gaming transactions.12 Incorporating the analysis of screening mechanisms into the design of tax frictions, then, has the potential toimprove the tax law’s ability to deter wasteful tax planningwhile imposing lower costs on regular businesstransactions. The key here is to take advantage of the information tax frictions can reveal about heterogeneity intaxpayers’ proclivity toward tax planning. Osofsky argues 5. Id. at 1063-71. 6. Id. at 1074-75. 7. See id. at 1091. 8. Id. at 1077 & n. 61, 1084. 9. Id. 10. David Gamage, On Double-Distortion Arguments, Distribution Policy,and the Optimal Choice of Tax Instruments 30-39 (Sept. 25, 2013) (unpublisheddraft manuscript) (on file with author). 11. Id. 12. Osofsky, supra note 3, at 1118-19.                                               1912014] A WAY FORWARDfor a general principle that frictions should be designed soas to impose higher differential costs on “tax planners”13— on those taxpayers who have both greater “ability anddesire to engage in tax planning.”14 To the extent thatfrictions can be designed to impose differentially greatercosts on tax planners, and lower costs on non-tax planners, the frictions should better deter the wasteful tax planningof the tax planners while imposing lower costs on theregular business activities of non-tax planners.15 Equally interesting, in my view, is that combining the methodologies of the tax screening and tax frictions literatures potentially offers a path toward a law andeconomics methodology capable of analyzing how detailed tax rules should be designed to account for distributional considerations. Alex Raskolnikov has recently elaboratedsome of the fundamental problems with applying law andeconomic methodologies to the study of detailed tax rules.16 Perhaps the most fundamental of these problems is that taxlaw is inherently about distribution.17 A number of scholars have suggested that the rules for calculating tax bases should be designed to promoteefficiency, with distributional concerns handled exclusively through the setting of tax rates.18 However, as I argue atlength in a recent work-in-progress, in light of evidence thatreal-world income and consumption taxes are subject tosignificant tax-gaming, it is important to consider distribution when designing the rules for calculating taxbases.19 13. Id. at 1061. 14. Id. at 1086-87. 15. Id. at 1089-91. 16. Raskolnikov, supra note 1. 17. Id. at 544-45. 18. E.g., David Weisbach, Line Drawing, Doctrine, and Efficiency in the TaxLaw, 84 CORNELL L. REV. 1627, 1655-59 (1999). Indeed, I have also made arguments along these lines in prior scholarship. See David Gamage & Darien Shanske, Three Essays on Tax Salience: Market Salience and Political Salience, 65 TAX L. REV. 19, 74-78 (2011). 19. Gamage, supra note 10, at 76-78.                                            192 BUFFALO LAW REVIEW [Vol. 62Osofsky’s analysis suggests that tax rules might bedesigned so as to take account both of heterogeneity intaxpayers’ tax planning proclivities and of taxpayercharacteristics relevant for distribution. It is generallyunderstood that the U.S. income tax is relatively successful at taxing the economic income of regular salariedemployees, but much less successful at taxing the economicincome of financiers and entrepreneurs and other taxpayerswith great wealth.20 By designing tax rules so as to create frictions that differentially impose higher costs on thesetaxpayers—who are more successfully circumventingexisting taxes—we can perhaps reform our tax system so asto better achieve equitable distribution at lower efficiencycosts.As Osofsky concludes: “It is time to ask, in a rigorousway, how different groups of taxpayers are bearing [friction]costs differently, based on underlying characteristics, and how these differences should affect tax law design.”21 It ismy hope that the coming decades will witness thedevelopment of a more refined tax law and economicsmethodology that is better suited to analyzing detailed taxrules. If so, Osofsky’s paper will undoubtedly play animportant part in the development of this (hopefully)forthcoming revolution in tax law and economics.20. See, e.g., David Gamage & Shruti Rana, Taxation and Incentives in the Business Enterprise, in ENTERPRISE LAW: CONTRACTS, MARKETS, AND LAWS IN THEUS AND JAPAN (Zenichi Shishido ed., forthcoming 2014) (manuscript at 10-12)(on file with author); Douglas A. Shackelford, The Tax Environment Facing the Wealthy, in  DOES ATLAS SHRUG? THE ECONOMIC CONSEQUENCES OF TAXING THE RICH 114 (Joel B. Slemrod ed., 2000). 21. Osofsky, supra note 3, at 1119. 

A Way Forward for Tax Law and Economics? A Response to Osofsky\u27s  Frictions, Screening, and Tax Law Design

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A Way Forward for Tax Law and Economics? A Response to Osofsky\u27s Frictions, Screening, and Tax Law Design

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