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Thursday, September 20, 2007

Repetti on Democracy and Opportunity: A New Paradigm in Tax Equity

James R. Repetti (Boston College) has posted Democracy and Opportunity: A New Paradigm in Tax Equity, 61 Vand. L. Rev. ___ (2007), on SSRN.  Here is the abstract:

Although there is consensus about the need for equity, academics and policy makers disagree about the best tax system because we have ignored the need to first identify equity goals appropriate for a just government and then to design a tax system to help achieve those goals. This article proposes that the principal equity goal underlying a just government is the creation of equal opportunities for all citizens to achieve self realization, i.e. to maximize their potential. It proposes, therefore, that a tax should be designed to achieve equal opportunity for self realization as one of its principal goals. Viewing equal opportunity for self realization as a design issue leads to the identification of another principle that is foundational - the promotion of democracy. Both political philosophy and empirical literature suggest that equal access to the electoral process and participation in the community has to exist in order for equal opportunity for self realization to exist. Designing a tax system to help achieve these goals will not only increase equity, but also may provide efficiency gains that analysts have previously ignored.

To illustrate the importance of designing a tax system based upon these equity principles, this article revisits the debate about the desirability of an income tax versus a consumption tax. It argues that a progressive income tax, which limits loss deductions, is better than an ideal consumption tax in establishing the conditions for equal opportunity for self realization and democracy. A progressive income tax that limits loss deductions burdens investment income, which is a major source of political power. In contrast, a consumption tax cannot burden the disproportionate political power of the wealthy because it only burdens investment income in narrow situations and wealthy individuals only consume a small percentage of their total income. Although taxpayers can use portfolio adjustments to eliminate the burden on investment income in an ideal income tax, they have not used such adjustments in our actual income tax. This behavior may result from taxpayer concern that portfolio adjustments can decrease the after-tax return below that obtained in a fully taxable situation due to our tax system's limitations on loss deductions and changes in applicable tax rates.

This article also analyzes some other efficiency and equity claims for the two forms of taxes. The efficiency claims for an ideal consumption tax versus our existing income tax are overstated when viewed in the context of real-world systems that take into account taxpayer behavior and transition relief. Given the uncertain efficiency gains of a consumption tax in the real world, there is a strong argument that the equity goals discussed herein should govern the selection of a tax system. Such equity goals favor a progressive income tax that burdens investment income.

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Comments

Democracy and Opportunity

I have not read the full article, but I am interested that consideration of Democracy and Opportunity does not lead to thoughts about USA (or British) Universal Inheritance - capital for all - as well as USA (or British) Universal Suffrage - votes for all: i.e. to thoughts of a judicious redistribution of receipts of gifted and inherited wealth in each succeeding generation in the interests of greater equality of opportunity.

"If any child deserves an inheritance, then all children deserve an inheritance."

See www.universal-inheritance.org or www.taxresearch.org.uk/Blog/2007/09/17/someone-has-to-say-we-need-more-progressive-taxation/

"The Wealth Gap

We hear a lot about the income gap and the wealth gap and what to do about the former - but never what to do about the latter. Why not?
People can be poor, in relation to others, not just because they are not good and conscientious workers, but because they inherit nothing during their lifetime while others inherit thousands, tens of thousands, hundreds of thousands, millions, tens of millions, hundreds of millions or even billions before they ever even lift a finger, given the unlimited gift and asset linked exemptions from the [UK] Inheritance Tax.

A wealth tax can only ever be a tax on the notional income from wealth, because higher rates would be confiscatory. It would be yet another measure to deal with the income gap - and not a very good one at that. We must recognise that the only time it is possible to do anything about the wealth gap - assuming we are genuinely concerned about it - is at the point of transfer from each generation to the next.

Inheritance Tax must be reformed in order to bring about in each succeeding generation a judicious positive redistribution of wealth that is neither created, earned, made nor saved by beneficiaries - with a negative (receipt) and progressive tax on lifetime receipts of gifted and inherited capital. This would be the start of a new kind of popular capitalism to take the place of unbridled dynastic capitalism. [In the UK] Only The Liberal Party (not the EU-fanatic Liberal Democrats) - with its British Universal Inheritance policy - and the Green Party - to a lesser extent - are talking about it. Is there a taboo elsewhere, hiding an uncomfortable but inspiring truth?


DANE CLOUSTON MA(Oxon) ACIB
Director, OPPORTUNITY - The Campaign for British
Universal Inheritance
www.universal-inheritance.org
PO Box 1148 Oxford OX44 7AT UK


Posted by: Dane Clouston | Sep 28, 2007 2:52:29 AM