The Recovery of Unlawful Taxes‪.‬

ABSTRACT The passing-on defense blocks the refund of tax payments that are found to be unlawful (e.g., unconstitutional, ultra vires, or mistakenly calculated). The defense is based on the rationale that fully reimbursing a taxpayer who passed on the tax burden to her consumers would enrich her. The taxpayer is entitled only to the tax portion she bore herself. This rationale has gained extensive support among legislators, judges, and scholars across the globe, and accordingly, the passing-on defense is widely applied in the United States and elsewhere. This Article takes the counterintuitive approach and shows that the very opposite of the defense's rationale is true: full restitution of overpaid taxes would never enrich the taxpayer, even where the entire burden of taxes is passed on to consumers. Moreover, the Article shows that the passing-on defense actually amounts to an additional tax levied in the market, which, in turn, generates social costs and hurts consumers. The conclusion is that the justification underlying the passing-on defense is false, and the defense should accordingly be rejected.