Paul L. Caron

Wednesday, July 25, 2007

Tax Panel at Today's Law & Society Annual Meeting

There is one tax panel today at the Annual Meeting of the Law & Society Association at Humboldt University in Berlin, Germany, organized by Neil H. Buchanan (George Washington):

Law, Society, and Taxation I: Competing Concepts of Equity (2:30 p.m. - 4:15 p.m.):

Discussions of justice in tax analysis have traditionally revolved around competing notions of horizontal and vertical equity. The papers in this panel critique and expand upon these concepts, analyzing anew the ability-to-pay criterion, applying critical theory to tax equity, and questioning the usefulness of horizontal equity in tax analysis.

Chair/Discussant:  Richard Schmalbeck (Duke)


This paper discusses the normative basis of the ability-to-pay principle and describes the implications thereof for the design and content of the income tax.

This presentation examines both old and recent criticisms of tax expenditure analysis and concludes that tax expenditure analysis stands up to the critiques and continues to be a robust and useful tax policy tool. The presentation is drawn from the paper entitled Rethinking Tax Expenditure Analysis and What It Tells Us about the U.S. International Income Tax Regime, part of which I will present at Law, Society, and Taxation III: International and Comparative Tax Issues.

This paper posits that, at least in a tax system in which the concept of income is defined with relation to welfare (as opposed to ability to pay) it is likely impossible to make strong horizontal equity claims about the relative tax treatment of otherwise similar taxpayers in different states or different nations. For example, the internal-to-tax rationale for section 164 of the U.S. Tax Code (the deduction for state and local taxes) is that deductibility is required to treat fairly taxpayers with similar incomes but different tax burdens. Relatedly, the internal-to-tax logic of the U.S. foreign tax credit appears to be that taxpayers who have given part of their income to another sovereign are less well off than other taxpayers who have not. These claims, I argue, cannot be substantiated. Among other problems, an accurate assessment of taxpayer "welfare" would demand that the taxing jurisdiction make an evaluation of the beneficial effects taxpayers realize from the system of taxation imposed by the other sovereign, including a judgment about how and when to evaluate transfer payments. Thus, any effort to assess horizontal equity runs up against the view (admittedly, external to tax) that such an evaluation is inconsistent with the premise of sovereignty and self-determination for each state. I conclude by observing that by setting aside horizontal equity, we can focus more closely on other, in my view more significant, considerations for setting tax policies that influence the relations between sovereigns. For example, there might be serious vertical equity implications of an international tax regime in which mutual tax crediting exists, not as a matter of internal tax policy, but as the result of bargaining.

This paper, which is currently at a very early stage, will consider the concepts of horizontal and vertical equity from a critical perspective. In particular, it will argue that critical tax scholars should be chary of framing their arguments in terms of horizontal and vertical equity because these concepts assume homogeneity along all lines except income and, therefore, effectively exclude any other considerations (e.g., race, gender, or sexual orientation) from playing a legitimate role in determining a just or fair allocation of tax burdens.

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