Simplicity Lost

We welcome guest bloggers Josh Blank and Leigh Osofsky who write today about their article on tax law simplification in the Pittsburgh Tax Review. 

Joshua Blank is a Professor of Law and the Faculty Director of Strategic Initiatives at the University of California, Irvine School of Law.  Prior to joining UCI Law in 2018, Blank was a member of the full-time faculty of NYU School of Law, where he served as Professor of Tax Law, Vice Dean for Technology-Enhanced Education, and Faculty Director of its Graduate Tax Program.  Blank’s scholarship focuses on tax administration and compliance, taxpayer privacy, and taxation of business entities.  He is currently working on two books under contract with Cambridge University Press.  

Leigh Osofsky is the William D. Spry III Distinguished Professor of Law at University of North Carolina School of Law. Osofsky has previously served as a tax lawyer in private practice and a clerk on the Second Circuit Court of Appeals, and has previously taught tax law at NYU School of Law and the University of Miami School of Law.  Osofsky’s scholarship focuses on tax policy, administrative law, and how federal agencies communicate complex legal regimes. 

This is a great pairing of tax scholars who found a forgotten provision of RRA 98 and remind us of one of the important goals of that legislation that got lost along the way.  Perhaps their article will rekindle both Congressional and administrative interest in this important topic and set us again on a path toward better tax administration both in legislation and implementation.  Keith

Scholars, policymakers, and taxpayers themselves often cite complexity as one of the worst problems plaguing the tax system. Complaints include, among other things, that the Internal Revenue Code (the “Code”) is too long, too difficult to read, very complicated, and, often, unclear.  Among the many costs of tax complexity are (1) billions of hours of paperwork and stress that taxpayers face each year, (2) monetary costs that taxpayers bear when they hire advisors and purchase software to report their tax liability and file their tax returns, (3) difficulty that taxpayers encounter when attempting to claim tax credits and other benefits, and (4) challenges the IRS confronts when attempting to deter tax avoidance and evasion opportunities that tax complexity often creates.


As we have discussed extensively, one way in which the IRS manages tax law complexity is through a phenomenon we have called “simplexity” – the presentation of complex law to the public as if it is simple, without actual simplification of the underlying tax law. The IRS relies on simplexity in many plain language explanations of the tax law, such as IRS Publications and automated legal guidance (in the form of the Interactive Tax Assistant). Simplexity enables the IRS to explain the tax law in ways the public is more likely to understand, thereby fulfilling the IRS’s duty to help taxpayers comply with the tax law. However, simplexity has its own problems, including oversimplifying the tax law, and, ultimately creating a two-tier system, whereby sophisticated parties enjoy benefits from the underlying, complex law, which benefits are not available to the general public.

What is often missed in the discussion of the complexity of the tax law (and the simplexity that flows from it) is that the Internal Revenue Service Restructuring and Reform Act of 1998 (“RRA 98”) embraced tax simplification as a real possibility. While typically better known for its structural changes to the IRS, RRA 98 also made some real promises regarding tax law simplification. However, as we detail in our article in the Pittsburgh Tax Review symposium on the 25th anniversary of RRA 98, this tax simplicity promise faded over time.  We uncover the history of the tax simplicity promise of RRA 98, and how this promise was lost over time. We draw out lessons we might take away for future tax simplicity efforts.

RRA 98 placed burdens on the IRS, JCT, and Congress itself, in furtherance of its tax simplicity promise. RRA 98 required the IRS to analyze the sources of complexity in federal tax law, and annually report its analysis to Congress. Congress also tasked JCT with providing Congress with regular reports on the state of the federal tax system. Moreover, JCT was required to provide Congress with a tax complexity analysis for proposed tax legislation. Indeed, RRA 98 provided that it would not be in order for Congress to consider tax legislation that was not subject to the required tax complexity analysis. Congress also placed some obligations on itself. RRA 98 provided that, going forward, the tax legislative process should be informed by front-line technical experts at the IRS. Together, these provisions indicated a serious commitment of resources to the project of tax law simplification.

Initially, the IRS and JCT made significant efforts to comply with RRA 98’s simplification provisions. In June 2000, the IRS provided the first tax law complexity report to Congress, and Congress held a hearing on the matter. In its report, the IRS identified systemic problems with the tax law that yielded tax law complexity, and identified specific ways to reduce tax law complexity. With both this report, and another that followed in 2002, the IRS took seriously its potential role in reducing tax law complexity, and Congress members heralded the work as some of the most important to follow from RRA 98. JCT likewise issued a study of the federal tax system in 2001, which offered recommendations for simplification. The over 1,000-page report represented a herculean effort on JCT’s part.

However, these efforts soon proved to be the apex of compliance with RRA 98’s simplification promise. After these reports, the IRS failed to fulfill its annual tax complexity reporting obligation, though it argued that the objective was achieved in other ways. JCT also never again undertook anywhere near as careful an examination of the complexity of the federal tax system. JCT has generally provided tax complexity analysis of proposed tax legislation. However, the quality and utility of this analysis has been inconsistent. As evident from the recent Tax Cuts and Jobs Act of 2017, JCT often provides analysis that is cursory, and sometimes misses entirely important tax complexity costs of proposed legislation. As for the involvement of IRS officials in the legislative process, the opposite appears to have been the trend since RRA 98, with the IRS having less of a seat at the legislative table as time has passed since 1998.

A fair amount of the blame for the loss of RRA 98’s simplification efforts can be laid at Congress’s feet. Congress failed to provide the funding needed for the IRS and JCT to sustain its tax complexity reporting over time (while also fulfilling all their other obligations). Congress also failed to take meaningful action on the early reports, or hold the IRS and JCT accountable for not following through in later years, undermining incentives to continue with them. Congress also structured the legislative process in a way that often excluded the possibility of meaningful input from IRS officials, and made it difficult for JCT to provide robust tax complexity analysis on proposed legislation. In this regard, the story regarding the lost simplification efforts can be seen as another iteration of a common perception of RRA 98: a congressional scapegoating of the IRS for tax system problems beyond the IRS’s own making.

However, there are also important lessons specific to RRA 98’s tax simplification promise, which can inform future simplification efforts. One big takeaway is that tax simplification cannot be achieved through a mere promise at a moment in time, but rather must be sustained, through dedicated congressional will, over time. Congress’s promises to involve the IRS in the legislative process, for instance, were not enough to ensure this outcome, especially as political headwinds changed. Instead, Congress may have to regularize the IRS’s involvement in the legislative process, including through potential, formal reporting requirements. Congress would also have to be willing to actually give the IRS and JCT the time they need to provide thorough complexity analysis of tax legislation, and would have to be willing to respond to it with real legislative change. Congress may consider other, more broad-based efforts, such as formalizing the Code, to make it easier for the general public to apply the tax law.  Redoubling efforts and adopting some of these reforms may be able to recover some of the simplicity lost with the abandonment of RRA 98’s tax complexity commitments.

In short, our article offers both some hope and some caution about efforts to simplify the tax law. The RRA 98 story is a hopeful one, in that it shows a moment in time in which there was real, political will to prioritize simplification in the creation and administration of the tax law. It also serves as a cautionary tale in how easy it is for legislative and regulatory actors to abandon simplification efforts as time moves on, and other priorities take precedence. The RRA 98 story thus illustrates the combination of political will, and sustained, concrete efforts that will be necessary to yield real tax law simplification.

When Can Concentrating Enforcement Resources Increase Compliance?

Today’s guest post is by Leigh Osofsky, who is an Associate Professor of Law at the University of Miami School of Law. The post is based on her article Beyond “Worst-First” Tax Law Enforcement, which is forthcoming in the Florida Tax Review. In this post and more fully in her article, Professor Osofsky make a convincing case that IRS should more deeply consider focusing its scarce resources on smaller segments of the population. Professor Osofsky draws insights from economic theory, criminology (including hot spots policing), behavioral economics, and psychology. What makes the paper so compelling is that she cogently explains the research in other disciplines, synthesizes the insights to come up with her own microdeterrence theory for tax compliance, and then applies the theory to a particular problem, cash business underreporting. The theoretical and practical combination is difficult to achieve. Other works by Professor Osofsky have also looked at tax administration, and include critiques of responsive regulation and the use of uncertainty as a tool to reduce the tax gap. Those other articles can be downloaded for free on SSRN and can be found here.  

This post continues our theme of highlighting creative approaches to reduce the tax gap, which we started last week with a post by Susan Morse on the use of narrative.   We will continue to feature the works of interesting and important scholars who tackle issues of tax administration and tax procedure. Les

Gary Becker revolutionized the legal literature with his theory of deterrence.  Becker explained that deterrence can be seen as a function of two main factors: the likelihood of detection and the size of penalties.  His work has spawned decades of scholarship focused on the optimal likelihood of detection and size of penalties.

However, in practice, it is often impossible to increase substantially the likelihood of detection across a population or the size of penalties.  The cash business tax sector provides a striking example of a situation in which there is unlikely to be a substantial increase in likelihood of detection or the size of penalties, despite widespread evasion of tax liability.  In such situations, we are left with the question: Is there any hope of substantially increasing compliance with the law?

In a recent article, Beyond “Worst-First” Tax Law Enforcement, I suggest that, under certain circumstances, it may be possible to increase compliance by concentrating enforcement resources in the form of enforcement projects, which will rotate throughout the population.  I call this process “microdeterrence.”  The central intuition of this article is that, in certain cases, microdeterrence might be able to increase compliance above what would be possible by applying enforcement resources on a uniform basis across the population.


The article has some foundation in the policing practice of hot spots policing and it may help us understand and improve existing tax enforcement.  Indeed, the IRS already acknowledges using project-based enforcement to direct some of its enforcement resources.  And other countries, such as the United Kingdom, have engaged in a carefully designed program of rotating “tax campaigns,” which focus on specific taxpayers and tax issues. Such projects have targeted particular industries at particular times, such as, in the case of just one example, a taskforce focused on security guards, bouncers, and their employees in London and the South East.

So, what is the case for microdeterrence?  As an initial matter, Henrik Lando and Steven Shavell, Edward Lazear, Jan Eeckhout, and others suggest that an economic case for concentration of enforcement resources can exist when compliance incentives would otherwise be inadequate.  In an extreme case, spreading enforcement resources across the population may yield no compliance because no individual would have a sufficient monetary disincentive to violate.  In such a case, compliance would increase by concentrating enforcement on a smaller subset of the population.  The economic theory dictates that enforcement resources should be concentrated on the largest subset of the population, such that that subset just has sufficient monetary incentive to comply.  More complicated economic models can suggest a case for concentration in other situations, such as when regulated parties do not have the same on / off parameters for compliance, or when potential compliance falls along a continuum (such as a range of possible income reports).

Other factors can increase the case for microdeterrence.  First, Mark Kleinman’s work helps illustrate how rotating enforcement projects can help increase compliance when the expected costs of noncompliance for any individual depend on the rate of compliance of the population.  In such situations, an enforcement project in a given subsector may raise rates of compliance in that subsector high enough to help sustain compliance going forward.  Similarly, work by Robert Cooter and others suggests that norms can enhance the case for microdeterrence when norms affect compliance but themselves depend on minimum rates of compliance.  In such cases, to the extent that local norms are particularly powerful, enforcement projects can help create compliance, which may activate norms of compliance.  The norms may help sustain compliance as enforcement projects move onto the next subsector.  Psychological factors, in particular uncertainty aversion and the availability bias, can also support microdeterrence.  As explored by Daniel Ellsberg and many others, individuals often exhibit an aversion to uncertainty, or unknown probabilities regarding a gamble.  Microdeterrence arguably makes an enforcement regime more uncertain by creating a substantially higher or lower probability of enforcement, depending on whether or not one is subject to an enforcement project.  To the extent that individuals experience uncertainty aversion, the greater uncertainty may yield higher compliance.  The availability bias may similarly leverage psychological factors to increase compliance.  The availability bias is a tendency to use salient events to judge probability.  To the extent that microdeterrence makes enforcement more salient, it may increase the perceived probability of enforcement, thereby increasing the perceived cost of noncompliance.  Finally, evidence from hot spots policing suggests that, to the extent that nodes of noncompliance can be identified, microdeterrence would work best by focusing in particular on such nodes.

After setting forth the theory behind microdeterrence, my article examines how the practice might apply to the particularly problematic cash business tax sector.  For a number of reasons fleshed out in the article, I argue that microdeterrence might help stem the widespread evasion in the cash business tax sector.  Of course, careful application and empirical evaluation would be needed to confirm when microdeterrence does, in fact, increase compliance.  However, a theory of microdeterrence is necessary to determine when it makes sense to apply microdeterrence experimentally.  This article develops that theory and suggests the merits of testing microdeterrence in the cash business tax sector.  Most fundamentally, this article argues that allocation of enforcement resources should be viewed as a crucial, third lever in deterrence theory, and shines light on this lever.