Unmasking and Deterring Congressional and Taxpayer Opportunism
33 Pages Posted: 3 Aug 2014
Date Written: August 1, 1998
One of the principal reasons why we enter into contracts is to prevent the occurrence of opportunistic behavior. To illustrate, suppose that in anticipation of his daughter's wedding the following week, a homeowner contracts with a painter to have his home painted at an agreed-upon price of $500 a day. Suppose further that three days later when the job is half complete and there are no other available painters, the painter demands an additional $100 per day payment or, if he has made full payment, sue the painter for a partial refund. Under contract law, the principle of good faith protects the homeowner from the painter's opportunism.
Acts of opportunism are not confined to contractual transactions -- the potential for opportunism also lurks in legislative initiatives. Congress, for example, has long sought to promote home ownership. Rather than contracting with private sector to build homes and then selling them at a reduced cost, Congress has encouraged home ownership through various legislative initiatives such as permitting taxpayers an income tax deduction for "qualified residence interest". By purchasing a home and accepting the congressional "offer" of a qualified residence interest deduction, homeowners receive a reduction in their income taxes.
This analysis contends that the congressional offer of a qualified residence interest deduction combined with a homeowner's decision to purchase a home in reliance upon this offer is the functional equivalent of a contract. If Congress decides to repeal this deduction, the homeowner who was previously entitled to a qualified residence interest deduction may have to pay an additional $100 annually of income taxes. When Congress violates the terms of its contract, participating homeowners must be made whole and awarded transitional tax relief: Congress, like painter in the prior example, should satisfy its commitments and not act opportunistically when attempting to raise revenue.
JEL Classification: K34
Suggested Citation: Suggested Citation