Daniel Schaffa

Research

Publications

1. Towards an Understanding of Tax Complexity

   Florida Tax Review 28(1): 176–254 (2024)

   Abstract

   The study of tax complexity has reached consensus on two things. First, complexity pervades the U.S. tax system. And second, it is not always clear what tax complexity means. Indeed, it is common practice for tax complexity scholarship to note the absence of a universal tax complexity definition and then conduct its inquiry without one. A universal definition of tax complexity has proven elusive because tax complexity means many different (although often related) things. This has made the tax policy analysis of complexity challenging. As an alternative to a definition, this Article proposes a framework with four elements for considering tax complexity—(1) an activity, (2) something that changes the ease with which that activity may be understood, (3) an effect on the person trying to understand that activity and (4) additional structure isolating the key tradeoffs and identifying what normative inputs are necessary to compare policy options. This Article demonstrates how much (if not all) of the tax complexity literature fits into this framework and how this framework may improve tax policy analysis. Ultimately, this framework facilitates clearer discussions of tax complexity and comparisons between tax systems in complex environments.

2. Capital Gains Realizations with James Hines

   Economics Letters 244: 1–4 (2024) SSRN NBER

   Abstract

   If there are important nondeductible costs to long-term investing, then higher capital gains tax rates may encourage or discourage investors from realizing accumulated gains. This ambiguity suggests that the sizeable observed effects of capital gains taxes on realizations may partly reflect factors other than the time value of money, such as investor anticipations of future tax rate changes.

3. Reimagining the Deduction for Employee Compensation

   University of Michigan Journal of Law Reform 57(2): 417–479 (2024) SSRN

   Abstract

   U.S. businesses pay trillions of dollars in employee compensation, a substantial fraction of which is deductible for tax purposes. This deduction reduces the taxable income of businesses, ultimately lowering business tax burdens by hundreds of billions of dollars. With a few exceptions, the tax code confers the same deduction to a business for every dollar of employee compensation, regardless of whether that compensation goes to an employee earning millions or an employee earning minimum wage. This is consistent with a pure Haig-Simons income tax, under which any business expense incurred ought to be deductible dollar-for-dollar. But many, if not most, tax policy objectives are inconsistent with a pure income tax, and the U.S. tax code is accordingly replete with substantial deviations from a pure income tax. This Article considers what would happen if the deduction for employee compensation also deviated from a pure income tax. It finds that allowing employers larger deductions for compensation paid to low-wage workers would counteract persistent deficiencies in the U.S. labor market. A larger deduction for low-wage workers would incentivize businesses to both hire more low-wage workers and pay them more. This would decrease the number of workers earning paltry wages, reverse the decline in U.S. labor force participation, restrain the employer market power exerted in many local labor markets, and correct the negative externalities from low-wage work. As part of its analysis, this Article considers how a larger deduction for low-wage compensation might be funded, focusing on funding sources that synergize with a larger compensation deduction for low-wage workers—including higher business tax rates and smaller deductions for high-wage workers—and it details the tradeoffs associated with these different policy options. This Article also explains why behavioral frictions may make an employer-side subsidy a more effective labor market intervention than an employee-side subsidy, such as the earned income tax credit (EITC).

4. The Intergenerational Equity Case for a Wealth Tax

   University of Cincinnati Law Review 90(3): 735–778 (2022) SSRN

   Abstract

   Intergenerational equity is commonly set aside in favor of other policy objectives, perhaps because of the extreme challenges inherent in adopting and applying an intergenerational equity normative framework. Even when there is a near consensus that the choices of today will have substantial costs in the future, these costs are often downplayed or disregarded. This Article asks whether there are measures that might offer redress to a generation for the costs imposed on it by its predecessors and finds that a one-time wealth tax is a promising option. Although its analysis applies more generally, this Article focuses on the widely understood intergenerational consequences of unsustainable deficits. While there is little evidence to suggest that the U.S. government’s current debt is near a crisis level, there is widespread concern about the pace at which the debt is growing. Eventually the rate at which the U.S. borrows must slow. When this happens, the government is likely to raise taxes, and the taxpayers affected will bear the burden of their predecessors’ deficit spending. If the tax increase is substantial and sudden, the newly burdened taxpayers may be worse off than their predecessors, and there will be a violation of intergenerational equity. This Article shows that the burden of a one-time wealth tax would be distributed approximately proportionally to the benefit that taxpayers, during the era of unsustainable deficits, derived from those deficits. In doing so, this Article offers a novel justification for wealth taxes: to restore intergenerational equity.

5. The Case for Subsidizing Harm: Constrained and Costly Pigouvian Taxation with Multiple Externalities with Daniel Jaqua

   International Tax and Public Finance 29(2): 408–442 (2022) SSRN

   Abstract

   Many activities are subsidized despite generating negative externalities. Examples include needle exchanges and energy production subsidies. We explain this phenomenon by developing a model in which the policymaker faces constraints or costs. We highlight three examples. First, it may be optimal to subsidize a harmful activity if the policymaker cannot set the first-best tax on an externally harmful substitute. Second, it may be optimal to subsidize a harmful production process if the activity mix at lower levels of output uses more harmful activities than the activity mix at higher levels of output. Third, it may be optimal to subsidize a harmful activity if there is a large administrative cost associated with taxing a harmful substitute. We also show how the functional form of the cost of administering a Pigouvian tax affects the optimal tax. When administrative cost is a function of only tax rates, the policymaker should tax each activity. However, an increase in the tax presents a tradeoff: lower externality, but higher administrative cost. A subsidy may be optimal for some externally harmful activities. When administrative cost is a function of only activity levels, it may not be optimal to tax every activity. If it is optimal to tax all of the activities, the policymaker should set the tax equal to the externality plus the marginal administrative cost. If it is not optimal to tax every activity, the complementarity between activities comes into play and it may be optimal to subsidize externally harmful activities.

6. The Economic Efficiency Case against Business Tax Privacy

   Seton Hall Law Review 50(1): 27–78 (2019) SSRN

   Abstract

   By statute, business tax returns are not publicly available. But with public access, investors would acquire useful information that would help them make better investing decisions; business tax compliance and planning would become more uniform, preventing tax-savvy firms from gaining an advantage over other relatively more productive firms; and businesses could learn from one another, which would spare firms the cost of redundantly developing the same tax strategies. In the long run, these efficiency gains could result in lower prices, higher wages, more innovation, more leisure, and better investment returns. In the debate over business tax privacy, these sorts of economic efficiency arguments have received surprisingly little attention. This Article argues that economic efficiency is central to the debate and may well change where we come out on business tax privacy.

Working Papers

1. Federal Collection of State Individual Income Taxes

2. How to Catch Capone: The Optimal Punishment of Interrelated Crimes with Daniel Jaqua

3. Nothing Left to Lose? Changes Experienced by Detroit Low- and Moderate-Income Households During the Great Recession with Michael Barr

   Washington Center for Equitable Growth Working Paper (2016) SSRN

   Abstract

   The Financial Crisis and ensuing Great Recession caused enormous hardship for households. Using original datasets, we examine the effects of the recession on a population many might think had nothing left to lose: low- and moderate-income households in the Detroit metropolitan area. We find that the Great Recession in fact imposed significant costs on these households, reducing employment and assets and increasing hardships in a wide variety of ways. Our findings suggest the need for more robust safety net policies and financial services that can help cushion the blows from sharp reductions in incomes and assets.

Shorter Works

1. “Production, Information Costs, and Economic Organization,” by Armen Alchian & Harold Demsetz

   We Are What We Read, Truth on the Market (November 2, 2026)

2. “The Integration of Tax and Spending Programs,” by David Weisbach & Jacob Nussim

   We Are What We Read, Truth on the Market (December 2, 2025)

Works in Progress

• The Effect of Tax Complexity
• The Regressivity of Complexity
• Consumer Surplus with Rigor
• Deterrence and Incapacitation with Daniel Jaqua

Teaching

At Richmond, I teach Federal Income Tax, Corporate Tax, Business Tax, Corporate Finance, and Tax Policy.