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University of Chicago Law Review

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601

Abstract

Most human interactions take place in reliance on tacit understandings, customary practices, and other legally unenforceable agreements. A considerable literature studying these informal arrangements (commonly referred to as social norms) has a decidedly positive flavor, arguing that many, if not most, of these norms are welfare enhancing. This Article looks at the less-appreciated darker side of social norms. It combines an analysis of modern sophisticated tax planning techniques with existing empirical studies of commercial relationships to reveal a disturbing connection. By relying on tacit understandings rather than express contractual terms, many taxpayers shift some of their tax liabilities to those whose opportunity to take advantage of social norms is more limited or nonexistent. The resulting inefficiency and inequity is the social cost of social norms. Reducing this cost, however, turns out to be a challenging task. This Article introduces a tax-focused classification of social norms and singles out the type of norms that are particularly inefficient. Unfortunately, while reducing the use of these norms (or eliminating them altogether) would be welfare enhancing, it is unlikely to succeed in practice. Indiscriminately attacking all norms is administratively easier, but socially costly. This Article proposes a compromise between these two courses of action that is more administrable than the first approach and less costly than the second. It also offers a guide that will assist the government in identifying particularly inefficient norms.

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