Osofsky — Volume 61, Issue 5

Tax law employs frictions—costs imposed on taxpayers—to screen between planners and non-planners, deterring sophisticated tax avoidance while avoiding burdensome costs on regular transactions. Osofsky argues frictions serve screening mechanisms by imposing differential costs on tax planners relative to non-planners. Traditional wisdom holds that frictions deter tax planning through increased compliance costs while avoiding disruption to regular business activity. However, friction framework reveals that frictions imposing disproportionate costs on less sophisticated taxpayers can prove perverse and inequitable. The wash sale rule exemplifies good frictions screening for tax planning motivation, whereas use-it-or-lose-it rules for flexible spending accounts impose higher costs on less sophisticated decision makers. Osofsky develops screening framework for evaluating frictions' desirability: good frictions impose greater costs on tax planners than non-planners, deter tax planning rather than continuing wasteful activity, and yield net efficiency gains outweighing taxpayer costs. This framework complicates conventional wisdom and suggests frictions serve multi-faceted roles beyond simple deterrence. Understanding frictions' screening function provides insights for tax law design and helps identify potentially problematic frictions that systematically burden less advantaged taxpayers.

Topics: Tax Law · Administrative Law

Keywords: tax frictions · screening mechanisms · tax planning · wash sale rule · tax law design · compliance costs · tax policy