April 10, 2007
Administrability Matters in the Federal Income Tax
Posted by Leandra Lederman

A topic I’ve been thinking about lately is the role of administrability in the federal income tax, meaning the cost to taxpayers to comply with the tax and the cost to the government to enforce it. It arises as an issue with respect to the question of how to apply the federal income tax to virtual worlds, for example, as I blogged previously. In fact, it comes up in a lot of contexts, though I think its importance has been underestimated in recent years.

A paper I just posted on SSRN argues, in part, that administrability underlies the different treatment by the federal income tax of reimbursed and unreimbursed expenses. Most of us have experienced the more favorable treatment a business expense reimbursed by an employer, for example, receives compared to an unreimbursed employee business expense. Many other exclusions of reimbursed or compensated amounts similarly are unmatched by a deduction in full for a comparable but unreimbursed expense or loss, even though an exclusion implicitly contains such a deduction. My paper argues that this differential treatment is neither puzzling nor inappropriate. Rather, the more favorable treatment accorded reimbursed amounts reflects a recognition that a reimbursement involves a third party to the taxpayer/government relationship who implicitly vouches for the claim by disgorging funds, while an unreimbursed amount does not. Thus, this area of substantive federal income tax law implicitly takes enforcement issues into account in its design. I find that very interesting because questions of how enforceable an otherwise appropriate tax law would be seem all too often to be afterthoughts, rather than central to the analysis.

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Comments (2)

1. Posted by Jake on April 10, 2007 @ 20:42 | Permalink

I certainly agree "that administrability underlies the different treatment by the federal income tax of reimbursed and unreimbursed expenses."

More debatable is the hypothesis that "questions of how enforceable an otherwise appropriate tax law would be seem all too often to be afterthoughts, rather than central to the analysis." Anecdotal evidence supporting this view is easy to find. But the longer view of our income tax system suggests that adminstrability has always been a primary concern; were it otherwise, tax lobbyists would have little to do.

Anyone who doubts this self-evident truth should review the publicly available lobbying efforts of TEI, NAM, and like organizations for more cost-efficient tax administration. Note, for example, the nearly 500 private industry comments on the FASB website that favor delaying FIN 48.


2. Posted by Leandra Lederman on April 11, 2007 @ 12:59 | Permalink

Great point. I complete agree with you that administrability historically has been very important, and that businesses and organizations lobby regarding compliance costs. I should have made clear that my concern is when issues of administrability take a back seat in contemporary scholarly analysis to issues of efficiency and equity; all of these tax policy considerations are important.

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