No Option: Thinking Through Elections

For the most part, I prefer less choice.  More choice can lead to less time and less pleasure.  Think about the decision to stay in or go out for dinner.  You look in your cupboards and there isn’t much.  Perhaps a can of tomato and rice soup.  So, you think, maybe it’s a good idea to go out.  But where?  Sometimes brainstorming the options alone is daunting, and after generating a list I simply decide to stay in.  And that’s a good outcome.  In a less ideal case, I’ll spend several hours on the internet, reading reviews of restaurants, looking at menus and prices, calling friends for views, only to become so daunted by the options and by the lack of an obvious “winner” that I’ll stay home.  I will never regain that time.  Worse yet, I do all that research – the internet research and calls – and I chose something.  But when I go to the restaurant it’s a disappointment.  I spend the night wondering if I could have made a better decision.  Cream of tomato soup with rice, and three extra hours, would be preferable.

In “Choosing Tax: Explicit Elections as an Element of Design in the Federal Income Tax System,” Heather Field approaches the issue of the role and value of explicit tax elections.  Apparently more than 300 explicit tax elections litter the Internal Revenue Code.  Field explains that an explicit election is a case where multiple possible tax treatments might apply to a single economic event.

The article makes three main contributions to the literature.  First, Field draws parallels between the tax planning critiques of implicit elections (where taxpayers are left free to opt in or out of particular tax regimes by redesigning their transactions) and the tax planning consequences of implicit elections.

Second, she provides a taxonomy of functions for explicit elections – reconciling discontinuous regimes, facilitating tax classification, promoting simplicity and ease of administration, and condoning tax planning.  Drawing from the wealth of Field’s examples, let me illustrate each.  An explicit election may be used to reconcile a discontinuous regime.  For example, a taxpayer may buy the shares or assets of a business.  At the end of the day, in each case the taxpayer has bought the business.  But the tax consequences that flow from the decision to make one choice over the other are very different.  Nevertheless, in some cases section 338 of the Internal Revenue Code allows the taxpayer to elect to treat a share purchase as an asset purchase.  The objective:  to offer the taxpayer the chance to treat two similar transactions the same for tax purposes.

An explicit election might be designed to facilitate tax classification.  These kinds of elections appear where a taxpayer’s activities might be characterized along a continuous spectrum – say, from corporate to non-corporate form.  Adding an explicit election to enable entity classification may help taxpayers address the difficult classification issues that arise in the middle of the spectrum, where very little differentiates one type of organizational arrangement from another (think check-the-box).

Elections that promote simplicity and administrability improve the ease of compliance or enforcement.  For example, making a flat standard deduction available to some taxpayers provides some record-keeping ease.

The final category in Field’s taxonomy:  condoning tax planning.  Some explicit elections allow taxpayers to achieve a complement of economic benefits that best fit their personal profiles.

Finally, Field delineates some recommendations for the design of explicit tax elections. They might be designed with default rules (so you only need to elect out of them), they may have eligibility limits, they may require technical guidelines, and in their design the policy-maker needs to be attentive to the risk of abuse.

At the end of the day, Field doesn’t make a decision about whether to stay in and eat soup or to go out for dinner.  That’s up to the reader.  So you should read the article and form your own view.  I’ve at least saved you the time in deciding whether or not to do that.