TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, October 20, 2017

Rethinking Fiscal Federalism’s Tax-Assignment Problem

Lord of the RingsPeter A. Prescott (Butler), One Tax to Rule Them All: Rethinking Fiscal Federalism’s Tax-Assignment Problem, 96 Neb. L. Rev. 1 (2017):

In J.R.R. Tolkien’s The Lord of the Rings, the Dark Lord Sauron created the One Ring to enslave the leaders of the elves, dwarves, and humans. On it, Sauron inscribed the latter half of this poetic warning: “One ring to rule them all, one ring to find them; One ring to bring them all and in the darkness bind them.” The intergovernmental tax system proposed here for the United States might well be described in the same way — one federal-level tax structure to “rule” (and largely replace) the fifty states’ current tax structures. Because the proposed structure is centralized, it would better “find” multi-state taxpayers and it would more efficiently and effectively “bring” and “bind” their corresponding tax bases (e.g., taxable income) before converting those bases into tax revenue that would feed expenditures at the federal and state government levels. To develop and support that proposal, this Article revisits fiscal federalism’s tax-assignment problem using traditional tax policy considerations and with an eye toward reevaluating the conventional wisdom disfavoring centralized taxation in light of recent developments in the field of behavioral economics. ...

Taken together, this Article’s proposed mix of centralized fiscal instruments and decentralized government responsibilities delivers an improved U.S. tax system while striking the right fiscal federalism balance. Part II of this Article begins by briefly describing the United States’ current federal and state tax system before providing a more detailed explanation of the proposed solution to fiscal federalism’s taxassignment problem. It closes by examining the proposed solution’s viability under the U.S. Constitution. Part III analyzes and compares the proposed solution to the current system using principles drawn from the fiscal federalism literature and traditional tax policy considerations involving economic efficiency, equity, and administrative complexity. Importantly, several key fiscal federalism objections to centralized taxation, particularly when that approach is combined with decentralized governmental spending, are reconsidered in light of recent advances in the field of behavioral economics. Part III concludes with the determination that the proposed solution is an improvement over the current system. Part IV discusses a handful of other alternatives that are occasionally championed in the tax law and fiscal federalism literature. Finally, this Article concludes in Part V with the observation that, while the proposed tax-assignment solution may be politically untenable in the United States at this time, it is certainly worth pursuing.

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