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Complexity and the Tax Code: A Textual Analysis

Author

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  • Charles Swenson
  • Hao Qu
  • Xiao Song

Abstract

Using a model from political economy, we predict that U.S. Internal Revenue Code sections and related Treasury Regulations will have more verbiage, complex terms, and cognitive complexity for tax-reducing sections to limit free riding and the scope of tax benefits. Using textual analysis, we find our model's predictions are generally supported using both Code and Regulations from 1997 to 2017. Importantly, the complexity of tax-reducing sections has a disproportionate impact on the Code and Regulations as a whole, which in turn may result in outsized compliance time and costs. Policy implications include that complexity (and related deadweight costs) may be an unavoidable feature of tax law, that tax benefits may be underutilized, and that suboptimal taxpayer behavior may result.

Suggested Citation

  • Charles Swenson & Hao Qu & Xiao Song, 2024. "Complexity and the Tax Code: A Textual Analysis," Public Finance Review, , vol. 52(4), pages 466-538, July.
    • Handle: RePEc:sae:pubfin:v:52:y:2024:i:4:p:466-538
    DOI: 10.1177/10911421241233110
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    References listed on IDEAS

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    1. Kay Blaufus & Malte Chirvi & Hans-Peter Huber & Ralf Maiterth & Caren Sureth-Sloane, 2022. "Tax Misperception and its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model," European Accounting Review, Taylor & Francis Journals, vol. 31(1), pages 111-144, January.
    2. Tim Loughran & Bill Mcdonald, 2011. "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks," Journal of Finance, American Finance Association, vol. 66(1), pages 35-65, February.
    3. Lawrence Kenny & Stanley Winer, 2006. "Tax Systems in the World: An Empirical Investigation into the Importance of Tax Bases, Administration Costs, Scale and Political Regime," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(2), pages 181-215, May.
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