Tax Elections as Screens

This paper challenges the consensus view that elective provisions in the tax law are necessary evils by proposing a novel account of tax elections as screening devices. To illustrate the mechanics of screening, it describes a fictional tax election that perfectly separates taxpayers of one type (honest compliers) from taxpayers of the second type (dishonest evaders). Building on this illustration, the paper applies the theory of screening to the most common tax election in the United States tax context: the election to itemize one’s tax-deductible expenses. I argue that a taxpayer’s choice to itemize can help reveal important taxpayer attributes, particularly when analyzed alongside other available tax return data. These attributes include the taxpayer’s earning ability, her responsiveness to taxes, and her propensity to voluntarily comply with the tax law. At bottom, this paper stands for the proposition that tax elections are low-hanging informational fruit. Even if many existing tax elections may not survive cost-benefit scrutiny in a future policy overhaul, they can be used to help policymakers and tax administrators harvest efficiency gains from our tax system at zero cost to redistributive equity.