Paul L. Caron

Wednesday, March 30, 2011

Kahng Presents Undertaxed Business Owners, Overtaxed Workers at BC

Kahng Lily Kahng (Seattle) presents Costly Mistakes: Undertaxed Business Owners and Overtaxed Workers (with Mary Louise Fellows (Minnesota)) at Boston College today as part of its Tax Policy Workshop Series hosted by Diane Ring and Jim Repetti. Here is the abstract:

Our central thesis is that the current income tax regime undertaxes business owners and overtaxes workers in unexamined and unjustifiable ways. We show how the income tax system can and does lead to misallocations of economic resources, including the perpetuation of gender, race, and class inequalities. Our analysis focuses primarily on outlays and their classification as either costs of producing income or items of consumption – a foundational distinction under the Haig-Simons definition of income. We find that the tax law is too generous and deferential in classifying business owners’ outlays as incurred in the production of income. Conversely, the law too readily dismisses workers’ costs of producing income, instead classifying them as consumption items. We show this first by analyzing tax jurisprudence with respect to outlays that are immediately deductible under § 162 and then by examining the rules governing capitalized costs. We go on to explain how the systematic bias in the tax treatment of business owners and workers reflects the cultural values of the first half of the twentieth century, the very period when the foundational principles of the income tax took shape. By relying on empirical evidence and a range of interdisciplinary research, we next demonstrate how the tax law reinforces and further entrenches these cultural values through allocative inefficiencies that overvalue business owners and undervalue workers. Finally, we propose solutions to rebalance the tax treatment of business owners and workers.

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The author's paper does not seem accessable and I would certainly not pay to read it, so my comments must be based on the above summary.

The author seems to feel that all types of "systematic bias" and "misallocations of economic resources" are caused by the fact that the tax law does not treat the worker as being in the "business" of being an employee. This limits the deductibilty of certain expenses, much as deductions are limited to those that are not in the business of real estate or of being investors.

1. Treating employees as being in a Schedule C business was considered in the '86 Tax Reform Act and in several later statutes. This was the last quarter of the 20th century, not the first half.

2. I cannot imagine how how this perpetuates "gender, race, and class inequalities."

3. Currently, the bottom half of all income earners pay only 3% of the tax burden. Does the author believe they pay too muh tax?

4. If the tax burden of business owners increase and they have less after tax profit, it seems they will hire fewer workers. How does this benefit workers.

5. It would help if the author could describe the class system she evisages. Is it Marxian? Will employees earning 6 figures and above, be entitled to deduct consumption items as business expenses?

6. How does this scholarship enrich the educational experience of her students?

Posted by: Ed D | Mar 31, 2011 8:27:08 AM