| Summary: | This article presents a new measure of the efficiency consequences of tax
policies and explains how this new measure can shed light on a wide range of
tax law debates. We build upon the “elasticity of taxable income” approach
pioneered by public finance scholars over the last quarter century and
extend that approach to address complex tax systems with multiple rates,
multiple bases, and administrative and compliance costs. The resulting
measure—the behavioral elasticity of taxable revenue, or BETR—captures
the change in real resources available to society caused by any marginal
change in tax rates, the tax base, or tax enforcement. We argue that the BETR
can serve as a guide to a broad array of tax policy puzzles, and we illustrate
the BETR’s utility by applying it to questions such as the proper treatment of
mixed personal/business expenses and the optimal mix of audits, reporting
requirements, and penalties. We also consider the relationship between the
BETR and the distributional aims of tax law. While the BETR is a measure of
efficiency and not distribution, the BETR can aid policymakers in deciding
both how much to redistribute and how to accomplish distributional
objectives most efficiently. We end with reflections on the implications of the
BETR for the design of non-tax legal rules.
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