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Taxation

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Combining Income and Wealth into a Single Instrument: A Review of Taxing Inequality

Jason S. Oh

Ari Glogower’s Taxing Inequality is an ambitious, thought-provoking piece. He makes three major arguments: (1) that the economic power theory justifies taxing wealth in addition to income, (2) that separate taxes on wealth and income are inferior to a combined tax that incorporates both into a single instrument, and (3) that the best way to accomplish this goal is to include in income an amount equal to an annuity-equivalent portion of the taxpayer’s wealth. Although it departs from the structure of the article, I will address (2) before considering (1) and (3) together.

Taxing Inequality

Ari Glogower

Economic inequality in the United States is now approaching historic levels last seen in the years leading up to the Great Depression. Scholars have long argued that the federal income tax alone cannot curtail rising inequality and that we should look beyond the income tax to a wealth tax. Taxing wealth also faces two central and resilient objections in the literature: A wealth tax penalizes savings and overlaps with a tax on capital income.

This Article moves beyond this stalemate to redefine the role of wealth in a progressive tax system. The Article first introduces a generalized framework for justifying a wealth tax centered in the relative economic power theory which explains how inequality of economic outcomes generates social and political harm. This theory formalizes the problem of inequality and has specific implications for how economic inequality should be measured and constrained.

The Article then describes design problems in coordinating taxes on labor income, capital income, and wealth as factors in inequality, and the limitations of each of these factors as a base for taxation. From this Article’s outcomes-based perspective, a capital income tax favors wealth holders relative to labor-income earners. A wealth tax, in contrast, disfavors wealth holders relative to labor-income earners and cannot account for taxpayers’ varying needs to save their wealth for different numbers of future periods. Finally, proposals in the literature for separate taxes on both income and wealth do not account for the relationship between the two as factors in economic well-being.

Finally, the Article introduces a redefined wealth tax as part of a new combined tax on both income and wealth. This approach first recharacterizes wealth and capital income as an annuity value (the “wealth annuity”), reflecting both capital income earned during the period and a portion of the taxpayer’s wealth principal. The wealth annuity is then added to the taxpayer’s labor income for the period to yield the combined base. This new tax base resolves the coordination problems with taxing labor income, capital income, and wealth as factors in economic inequality; accounts for the needs of savers; and tailors the tax base to the specific ways that inequality causes social and political harm.

Regulation and Distribution

Richard L. Revesz

This Article tackles a question that has vexed the administrative state for the last half century: how to seriously take account of the distributional consequences of regulation. The academic literature has largely accepted the view that distributional concerns should be moved out of the regulatory domain and into Congress’s tax policy portfolio. In doing so, it has overlooked the fact that tax policy is ill suited to provide compensation for significant environmental, health, and safety harms. And the congressional gridlock that has bedeviled us for several decades makes this enterprise even more of a nonstarter.

The focus on negative distributional consequences has become particularly salient recently, playing a significant role in the 2016 presidential election and threatening important, socially beneficial regulatory measures. For example, on opposite sides of the political spectrum, environmental justice groups and coal miner interests have forcefully opposed the regulation of greenhouse gases through flexible regulatory tools in California and at the federal level, respectively.

The time has come to make distributional consequences a core concern of the regulatory state; otherwise, future socially beneficial regulations could well encounter significant roadblocks. The success of this enterprise requires significant institutional changes in the way in which distributional issues are handled within the executive branch. Every president from Ronald Reagan to Barack Obama has made cost-benefit analysis a key feature of the regulatory state as a result of the role played by the Office of Information and Regulatory Affairs, and the Trump administration has kept that structure in place. In contrast, executive orders addressing distributional concerns have languished because of the lack of a similar enforcement structure within the executive branch. This Article provides the blueprint for the establishment of a standing, broadly constituted interagency body charged with addressing serious negative consequences of regulatory measures on particular groups. Poor or minority communities already disproportionally burdened by environmental harms and communities that lose a significant portion of their employment base are paradigmatic candidates for such action.

Implementing Disaster Relief Through Tax Expenditures: An Assessment of the Katrina Emergency Tax Relief Measures

Meredith M. Stead

Over the past several decades, Congress has turned increasingly to tax expenditures rather than to direct outlay programs to implement social welfare programs. Such a trend creates economic distortions and has proven disadvantageous to taxpayers in lower socioeconomic classes. The newest twist is in the area of disaster relief. Unprecedented before 2001, tax relief targeted to a disaster in a specific geographic region has now been established on two occasions-in the wake of the 9/11 attacks and in the aftermath of Hurricane Katrina. This Note argues that, in a disaster, both the vulnerability of lower-income taxpayers and the weaknesses of the Internal Revenue Code as an instrument for social programs are amplified. This problem was particularly acute after Hurricane Katrina. Congress should therefore reconsider the current trend toward using tax expenditures rather than direct relief in such situations, or alternately structure other relief to correct for its shortcomings.

“Stranger than Fiction”: Taxing Virtual Worlds

Leandra Lederman

Virtual worlds are increasing in commercial importance. As the economic value of computer-generated spaces soars, questions of how to apply our tax law to transactions within them will inevitably arise. In this Article, Professor Leandra Lederman argues for federal income tax treatment that reflects the differences between “game worlds” and “unscripted worlds,” arguing that the former should receive more favorable tax treatment than the latter. Specifically, she argues that transactions in game worlds such as World of Warcraft should not be taxed unless the player engages in a real-market sale or exchange. By contrast, in intentionally commodified virtual worlds such as Second Life, federal income tax law and policy counsel that in-world sales of virtual items be taxed regardless of whether the participant ever cashes out.

Judicial Decisions as Legislation: Congressional Oversight of Supreme Court Tax Cases, 1954–2005

Nancy Staudt, René Lindstädt, Jason O’Connor

This Article offers a new understanding of the dynamic between the Supreme Court and Congress. It responds to an important literature that for several decades has misunderstood interbranch relations as continually fraught with antagonism and distrust. This unfriendly dynamic, many have argued, is evidenced by repeated congressional overrides of Supreme Court cases. While this claim is true in some circumstances, it ignores the friendly relations that exist between these two branches of government—relations that may be far more typical than scholars suspect.

This Article undertakes a comprehensive study of congressional responses to Supreme Court tax cases and makes a surprising finding: Overrides, although the main focus of the extant literature, account for just a small portion of the legislative activity responding to the Court. In fact, Congress is nearly as likely to support and affirm judicial decisionmaking through the codification of a case outcome as it is to reverse a decision through a legislative override. To investigate fully the nature of congressional oversight of Supreme Court decisionmaking, this Article undertakes both qualitative and quantitative analyses of different types of legislative review of Supreme Court decisions—examining codifications and citations, as well as overrides, in legislative debates, committees, and hearings. The result is a series of important and robust findings that challenge and build on the Court-Congress literature, identifying the legal, political, and economic factors that explain how and why legislators take notice of Supreme Court cases.

The study reveals a complex and nuanced interbranch dynamic and shows that the Justices themselves affect the legislative agenda to a greater extent than previously understood. This result challenges scholars who have questioned whether the Supreme Court should have jurisdiction over complex issues, such as those in the economic context, in which the Justices may lack sufficient training. This Article argues that scholars have little need to worry about Court decisionmaking in these areas: Not only do legislators routinely review the Court’s decisions, but they also frequently confirm the outcomes as valuable contributions to national policymaking via the codification process.

Layovers and Cargo Ships: The Prohibition of Internet Gambling and a Proposed System of Regulation

Ryan S. Landes

Since its emergence in the 1990s, Internet gambling has grown into a $12-billion-per-year industry. In October 2006 Congress passed the Security and Accountability for Every Port Act, which includes a provision that prohibits domestic financial institutions from moving funds to and from online casinos, all of which are located overseas. While the new law has certainly caused a major stir in the Internet gambling community, users and overseas companies are continuing to find new ways to circumvent it. In this Note, the author first gives an overview of the gambling industry and the problems it poses to gamblers and communities. The author then reviews the tactics Congress attempted to use over the last decade in fighting Internet gambling—criminalizing the operation of a gambling website, criminalizing individual gambling, and criminalizing funds transfers to and from casinos—and explains why each method fails to address, and often exacerbates, the very problems the legislation seeks to resolve. The author then proposes a new method of regulation and explores how that system could significantly reduce the problems of Internet gambling.

Sunset Provisions in the Tax Code: A Critical Evaluation and Prescriptions for the Future

Manoj Viswanathan

In this Note, the author argues that sunset provisions associated with tax legislation are, in their current form, the product of political maneuvering designed to bypass budgetary constraints and are exploited as a means of enacting what is, in reality, permanent legislation. The use of sunsets in this manner has lead to considerable uncertainty regarding the future of their associated tax provisions. This uncertainty, in turn, has created opportunities for legislators to extract rents from lobbyists, generated inefficiencies for both taxpayers and the government, and increased overall tax code complexity. These problems can be minimized, however, if sunsets are used in a more principled manner. This Note argues that sunset clauses in tax legislation can be made more efficient by limiting both the occasions in which sunsets are employed as well as the procedures used to implement them. First, sunsets should only be used in conjunction with certain kinds of tax incentives: The incentives should be simple, of limited duration, and provide diffuse rather than concentrated benefits. Second, sunsets should only be implemented through a limited set of congressional budgetary procedures: They should only be included as part of the reconciliation process for enacting fiscal legislation if the underlying bill increases rather than decreases revenue, and if Congress enacts and adheres to a revenue-neutral, pay-as-you-go set of budgetary rules. These changes, both substantive and procedural, will increase overall efficiency in the use of sunset provisions in tax legislation.

Taxing Citizens in a Global Economy

Michael S. Kirsch

This Article addresses a fundamental issue underlying the U.S. tax system in the international context: the use of citizenship as a jurisdictional basis for imposing income tax. As a general matter, the United States is the only economically developed country that taxes its citizens abroad on their foreign income.

Despite this broad assertion of taxing jurisdiction, Congress allows citizens abroad to exclude from taxation a limited amount of income earned from working outside the United States. Influential lobbying groups, including businesses that employ significant numbers of U.S. citizens abroad, argue that this exclusion is necessary in order to keep American business competitive overseas. Recently, these groups have argued that modern developments, including lowered barriers to trade and the increased mobility of workers, strengthen this argument, and that the United States must allow an unlimited foreign earned income exclusion, or perhaps abandon citizenship-based taxation altogether, in order to remain competitive.

This Article analyzes how modern developments in the global economy affect the case for citizenship-based taxation. The Article concludes that recent globalization trends strengthen, rather than weaken, the case for taxing U.S. citizens living abroad. Moreover, it concludes that these modern developments weaken the case for giving preferential treatment to income earned by citizens working abroad.

What is a Progressive Tax Change?: Unmasking Hidden Values in Distributional Debates

David Kamin

There is widespread confusion both in policy circles and in the academic literature about how to measure the progressivity of a tax change. The confusion is particularly vexing because policymakers and analysts often rely on progressivity as a guidepost in constructing and analyzing policy, but do little to justify the particular progressivity measures that they employ. Progressivity measures—which can differ considerably from one another—tend to be picked haphazardly or chosen based on arguments that have rhetorical flair but lack normative substance. Thus, policy is being constructed and evaluated based on distributional measures that may not be meaningful and, in fact, may be misleading. This Note proposes a framework for analyzing measures of progressivity. In particular, if the measures are to gauge accurately changes in tax fairness, progressivity measures must be rooted in whatever theory of distributive justice motivates our concern for distribution. This Note applies this approach and draws connections between particular measures of progressivity and individual theories of distributive justice.