Phantom Tax Loopholes

Abstract

This Article reports the results of a new survey of 726 U.S. adults designed to gauge people’s intuitions about tax law. Survey respondents consider several scenarios. In each scenario, the survey describes two ways that parties to a transaction can achieve their non-tax objectives. The two available routes are equivalent from a non-tax perspective. The survey asks respondents to provide their best guess about whether the two routes will produce the same or different U.S. federal income tax consequences. The survey asks
respondents to rate on a five-point scale how confident they are that their answer is correct and to explain why they select their chosen response. They are also asked whether, in their opinion, the options should receive the same or different tax treatment, and they are asked to rate the strength of their opinion on a five-point scale. In general, this study’s results show that many respondents harbor form-driven intuitions about tax law. That is, they expect the form of a transaction will dictate its tax outcome. 

The results point to what may be a side effect of tax law’s failures—in some contexts—to appropriately tax transactions and its tendency to benefit the well-advised. In particular, non-experts expect tax law to contain “loopholes” even in cases when it does not. The results demonstrate the propensity of tax law to trap unwary taxpayers, in that, in many scenarios, respondents’ best guesses about tax outcome diverge from actual law. The results underscore the need to clearly prompt taxpayers when reporting of non-cash income is required and suggest that, absent such prompting, lack of compliance may be attributable not just to willful evasion but also to a failure to understand what tax law requires. The results reveal information about perceptions of the (un)fairness and complexity of tax law. Finally, the results offer one additional justification for closing actual tax “loopholes”—the prospect that doing so might exorcise phantom ones.