Tuesday, May 31, 2011
The “optimal tax model” is the most significant development in the study of taxation in the last fifty years. It is a mathematical model that purports to measure the social welfare effects of taxation by integrating fairness and efficiency concerns, the two central – and sometimes conflicting – values in tax policy. While originally developed by economists, legal scholars have overwhelmingly embraced the optimal tax model as the tool for evaluating competing tax designs.
This article is the first challenge in the legal literature to the normative implications of the optimal tax model. It critiques a key assumption underlying the model – that an ideal tax would be based on an individual’s ability to earn income, rather than the income that is actually earned. While that assumption initially appears consistent with the intuition that tax should be based on one’s ability to pay, this article explains why a tax based on potential earnings would be unjust. It argues that the principles of liberty and equality prohibit a tax based on earning potential, and that the optimal tax model is therefore problematic from the perspective of fairness in taxation. Although different political theories lead to different conclusions about the design of fair taxes, this article makes clear why no theory of justice would embrace the ideal that underlies the optimal tax model. It concludes that legal scholars should consider the injustice of the foundation on which the optimal tax model is built before embracing the products of its analysis.