Tax Complexity: Problem or Opportunity?

Abstract

When laws are complex or ambiguous, compliance and enforcement suffer. In the United States, the federal income tax is a familiar example of this. Often, neither the taxpayer nor the Internal Revenue Service (IRS) can perfectly determine a taxpayer's true tax liability. Uncertainty, ignorance, and burdensome documentation requirements deter some taxpayers from taking advantage of legitimate deductions and credits, whereas others find opportunities for creative tax avoidance in ambiguous provisions. Complexity undermines the IRS's ability to distinguish among intentional evasion, honest misinterpretation of the tax code, and legitimate tax avoidance. This model shows that the IRS cannot always profitably exploit complexity.