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Article Excerpt
INTRODUCTION
The papers by McClelland (2006) and Mills (2006), together with the presentation by Potter (2006), highlight the difficulties that analysts and researchers face when trying to design, model, and eventually administer, changes in tax law. Regardless of how knowledgeable a researcher is or how sophisticated their approach is to studying tax issues, tax policy is inherently a complicated combination of economic and legal theory (both often compromised) interpreted in the "real world" by accountants and lawyers. As these authors highlight, each field approaches tax policy issues with a different perspective, and any attempt to understand the effects of tax policy requires a basic understanding of the concerns, and tools, that each discipline possesses.
MULTI-VERSUS INTER-DISCIPLINARY RESEARCH
There is an important semantic difference to highlight between multidisciplinary and interdisciplinary research. Interdisciplinary generally relates to multiple, but distinct, academic fields, each providing a perspective on the analysis of a particular problem. For example, in studying tax evasion, economists may model the utility functions of taxpayers and factors affecting individual choice, including the marginal financial benefit of evasion (related to the level of income and the tax rate) and taxpayers' preferences towards risk (to assess the responsiveness to the probability of detection). A behavioral scientist may approach the same question with a focus on the attitudes of taxpayers (or the general public's) views of the Internal Revenue Service (IRS), the efficiency of government programs, or taxpayers' perceptions of social norms. Each of these approaches can add to the understanding of taxpayer behavior, and each approach captures a relevant aspect of the tax system, but neither may actively incorporate the theories of the other field.
Multidisciplinary, by contrast, suggests an integration of the knowledge and tools of various disciplines into a single piece of research. As a result, the benefits of multidisciplinary research should be non-negative; at worst, the inclusion of additional insights may not have additional empirical significance. Multidisciplinary research could also provide benefits by helping to identify limits to what each field can say, suggest modification to improve existing research, or identify new topics for study.
STRENGTHS OF EACH FIELD
The papers by McClelland (2006) and Mills (2006) and the presentation by Potter (2006) identify the important contributions to the analysis and design of tax policy of each of the three fields. With respect to economics, McClelland (2006) highlights the central importance of economic theory in providing a framework that stresses efficiency and the possible behavioral effects of poorly designed tax policy. Economics also provides a mathematical and statistical framework for analysis, a role that is unique among these three disciplines.
By contrast, as Potter (2006) points out, the legal contribution to tax law, at least in its legislative and regulatory stages, is choosing the right words to define the intent and scope of the law. The implications of needing a clear set of rules to administer the tax law is a trade-off: while targeting a particular activity may reduce dead-weight loss and thereby address some of the efficiency concerns of economists, such targeting "can add significant complexity and increases administrative cost." An important observation from the administration of the tax law that has immediate implications for research is that a change in law cannot be expected to affect behavior unless, and until, those affected by it have clear guidance and fully understand all aspects of the tax change.
Accounting research may provide a bridge between the institutional issues raised by lawyers and the application of economic theory. In this role, as described by Mills (2006), a better understanding of accounting rules can lead to an improved understanding of the data generated both by the tax system and the financial reporting system. In addition, accounting (overlapping with finance) introduces alternative objective functions of firms, along with additional constraints on firm behavior.
The remainder of this paper focuses on problems with, and potential improvements to, economic models of corporate behavior, both theoretical and empirical. The intent is not to criticize a particular field--both law and accounting rely on economics to inform their thinking--but rather to show how future research might be influenced by a better understanding of law and accounting.
INCOMPLETE MODELS OF FIRM BEHAVIOR
Theoretical models of firms' behavior are, by necessity, stylized interpretations of observed behavior. Within the theory of the firm, the basic approach is to model a firm's decisions under the assumption that the objective is to maximize the present value of after-tax profits. Consider a simple discrete time model of firms' objective:
max = [T.summation over (t=1)] (1 - [[tau].sub.t])F(t,[x.sub.t],[x.sub.t-1]),
subject to [x.sub.t] [greater than or equal to] 0, t...
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