More Efficiency and Increased Equity in Taxation under Mayo

Abstract

This paper addresses the impact of Mayo Foundation primarily from a Public Choice perspective analyzing the impact of the case on the behavior of the major actors in this case specifically and in tax policy generally. The paper suggests that rent-seeking behavior will shift increasing the focus on regulator rent-seeking at the IRS. Furthermore, the IRS's procedures will likely take center stage in light of the increased deference. While it is too early to tell how Congress and the Court will deal with procedural issues that will likely arise as a result of the increased deference, this paper suggests that the IRS will likely bolster its notice-and-comment procedures. There will also be further scrutiny of the IRS position that its regulations are predominantly interpretative and exempt from certain procedures. This paper suggests that the ultimate result will be slightly reduced and altered rent-seeking behavior. Pressure for increased procedure in IRS rule making. Finally the paper looks at the specific facts of the case and analyzes the choice to exclude medical residents from the student exemption. The paper suggests that increasing the sunk cost investment necessary to become a doctor will likely result in higher medical costs. Due to the increased barrier to entry it is plausible that this policy could not only be socially unproductive but could lead to a net loss for taxpayers. The increased deference will likely make tax policy more effective, efficient and consistent. It will also likely reduce rent-seeking in tax policy. That said, the particular case of FICA taxes on medical residents should be empirically studied because while there are strong policy reasons supporting allowing young doctors to begin building social security credits, it plausible that this tax could ultimately net a loss for tax payers as a whole. Ultimately it is an empirical question that should be answered. As a final matter, it is likely that such cost/benefit analysis for tax policy might be advantageous to ensure that policies are in the best interest of tax payers. Such cost/ benefit analyses are required by executive order for other regulations. This order should perhaps be expanded to cover IRS interpretative rule making, or even better congress should include IRS rule making in their bill on the matter.