Rent-Seeking and the Volume of Tax Laws: The Tax Cuts and Jobs Act of 2017

Abstract

Taxes have a significant impact on individuals and firms. Unfortunately, complexity in the tax law has led to economic inefficiency due to inefficient use of tax breaks and increased audits and related penalties. Part of such complexity is driven by the sheer volume of tax law. To explain this phenomenon, we model tax law volume as a function of wealth transfers from the rent seeking/theory of regulation literature. Our models predict that both overall volume and the number of specific terms (defined by words in our specific “dictionary”) is higher for groups receiving tax breaks, and lower for more heavily taxed groups. The specific terms attempt to control for free riding across groups, and to limit tax breaks within groups. Using textual analysis, these predictions are supported in tests using the Tax Cuts and Jobs Act of 2017. Also, consistent with theory, we find that tax breaks are given to relatively smaller groups, and tax increases are spread across relatively larger groups.