Thursday, March 28, 2013
Luck, income, wealth, and taxation have always been, and still are, inexorably intertwined. The connection between the latter three is obvious and driven by practical necessity—one cannot collect a tax from someone who has nothing to pay it with. Taxing previously-acquired wealth or current income solves the collectability problem. Luck enters the picture as one of a handful of important factors contributing to acquiring wealth and to earning income. Like just about everything else in life, that luck-generated economic success has federal income tax consequences for the lucky recipient. But does the current income tax treatment of that success hold up under scrutiny? If not, then how should the federal government tax “lucky” income? And, how should Congress and the IRS decide which income is “lucky” and which is not? This Article wrestles with those thorny questions using the traditional tax policy considerations of economic efficiency, equity and distributive justice concerns, and practical administrative issues related to increasing legal complexity before concluding that taxable income attributable to luck should be segregated from other types of income and subjected to a fixed tax rate that exceeds the top marginal tax rates on ordinary income earned by individuals.