How Tax Models Work

Models are at bottom tools for approximate thinking; they serve to transform your intuition. . . . You must start with models and then overlay them with common sense and experience.-Emanuel Derman 8c Paul Wilmott1IntroductionImagine a very simple model of tax compliance: a person complies with the tax law when she believes that the expected value, measured in dollars, of complying is greater than the expected value, measured in dollars, of not complying.2 What can we learn from this model about the real world? To answer this question, we need to know how this model is meant to tell us about the world. What is the mechanism by which we are supposed to learn about the world from a model?Here is one critique of this simple model: "People take things into account other than just the dollar value of the penalty when they are trying to figure out what will happen to them if they do not comply with the tax law." Here is another critique: "Your model deals with something called 'dollars,' so it does not apply to my situation, because I am trying to figure out tax compliance in Belgium, where the currency is called 'Euros.'" The first critique seems useful; the second one does not. But why? Unlike many social and physical sciences, including economics, biology, and physics, legal scholarship includes little or no discussion of what models mean, how they are connected to the real world of law and policy, or how models should and should not be used by legal scholars. This void exists notwithstanding legal scholarship's increasing reliance on explicit modeling, including, for example, work in law and economics and in empirical legal studies. This Article engages scholarship on the philosophy of modeling in order to understand how legal scholarship does and should use models.This Article lays out a path between two extremes. At one extreme is scholarship that employs models without either reflection or selfconsciousness to make real-world recommendations; at the other is scholarship that rejects models because their assumptions are too far from reality. This Article argues that neither approach is correct. Mod- els are useful and important for legal scholarship, but not in the way that both critics and proponents believe.This Article neither attacks nor defends the use of models. It does not argue that law professors should not use economic models, or that law professors necessarily or even usually use economic models incorrecdy. Rather, this Article explains a mechanism by which models may work. Specifically, this Article argues that we reason from models to the real world through leaps, creativity, and intuition. Once we understand the way models work, we can understand how to use and critique models more effectively. Economic models cannot provide certainty, but models are nonetheless one important voice in an ongoing, necessarily inconclusive conversation.This Article has three main parts. The first is descriptive, and explores how tax legal scholarship uses economic models such as the optimal tax model and the expected utility model.3 The second is analytic, and asks what philosophy of science, in particular philosophy of economics, tells us about models, both in general and in legal scholarship. The third is prescriptive, and uses this deeper understanding of models and modeling to describe and propose ways that tax legal scholarship can use models.Part I defines "model" for purposes of this project, and then provides examples of two economic models and how tax legal scholars have used them.4 Part II draws on philosophy of science literature to lay out four possible ways that models could work and concludes that models in legal tax literature are best considered as creating credible worlds from which we may reason ampliatively to the real world.5 Part III shows how the credible world understanding of models can improve how legal scholarship uses models.6I. Models in ActionThis Part defines "model" for purposes of this Article and then provides examples of economic models as used in tax legal scholarship. …