Weekly SSRN Tax Article Review And Roundup: Holderness Reviews Viswanathan's Tax: A Unified Theory of Tax Progressivity

This week, Hayes Holderness (Richmond) reviews Manoj Viswanathan (UC Hastings), A Unified Theory of Tax Progressivity:

I assume I am not the only tax professor who has stood before a group of bright-eyed tax students and explained to them that progressive taxes impose higher tax rates on taxpayers as their income rises, proportionate taxes impose the same tax rates regardless of income, and regressive taxes impose lower tax rates as income rises. I offer to the students that the federal income tax rate brackets provide an example of progressivity; sales taxes an example of regressivity. In A Unified Theory of Tax Progressivity, Manoj Viswanathan reminds me of just how much I have been glossing over in my introductory tax policy lessons.

Viswanathan takes these intuitive notions of vertical equity and dices them apart, exposing the messy definitional issues they face. Confronting these definitional issues is critically important to having honest tax policy discussions and to implementing sound taxes. Otherwise, tax experts and policymakers can inadvertently talk past each other when considering the desirability or impact of a particular form of taxation. Viswanathan does not rest after setting the rules for debates about progressivity; he proceeds to recommend tangible steps for clarifying the progressive nature of our tax system by advocating for the use of earmarked taxes.

The article begins by arguing that there are two things that must be defined in order to engage in any constructive analysis of the progressivity of a tax. First, the tax base must be defined, and second, the “progressivity base” must be defined. By “progressivity base,” Viswanathan refers to the taxpayer attribute that determines the distribution of the tax base. Typically, the progressivity base is taxpayer income, regardless of the tax base, but too often this fact is unstated. Failing to articulate both the tax base and the progressivity base can lead to confusion in the analysis. For example, the tax base for sales taxes is consumption, but such taxes are often viewed as regressive despite the fact that taxpayers with more consumption pay more tax. This is because the progressivity base for sales taxes is commonly understood to be income, not consumption.

Okay, sure, one might be thinking; of course measuring the progressivity of a tax requires explaining the measure of progressivity. If this observation were Viswanathan’s only contribution, the article would fall flat. He goes further though and demonstrates the many ways that a particular tax could be considered progressive, regressive, or even both, if the tax base and the progressivity base are not both clearly defined and measured, making meaningful debate about tax reform and action in that regard exceedingly challenging and imprecise.

The article picks up steam as it continues to dig into the problems of analyzing progressivity, specifically as it approaches the measurement problem. Forget progressivity; anyone familiar with the federal income tax will relate to the difficulties of measuring income as a tax base. Those same difficulties exist when determining the progressivity base, and they can be compounded when the tax base and the progressivity base are not the same. We simply cannot be sure that we are achieving the desired level of progressivity in our tax system if we cannot measure different taxpayers against each other.

Viswanathan shines in his analysis of the problems of measuring the progressivity base and the consequences of inaccurate measurements. He observes that the base itself can be difficult to measure; for example, as noted “income” is hard to get a full handle on. But he also argues that progressivity itself can have micro- and macroeconomic effects on taxpayers that skew the ultimate progressivity of the tax system. These effects must entered into the progressivity analysis.

This discussion of the problems with measuring the progressivity base is so compelling, that I wish the article would go a little further. Viswanathan is careful to avoid normative judgements about the appropriate levels of progressivity in the tax system, but it would be interesting to see him develop a normative progressivity base or at least an approach to determining a normative progressive base. Surely, the normative base would depend on the purpose for which progressivity is adopted, but the article seems to come close to arguing that income or wealth would be appropriate progressivity bases if redistribution of resources is the goal. A fulfilling next step would be an analysis of how we should think about what the progressivity base should be.

Though Viswanathan places these normative issues to the side, his analysis does not end by simply presenting the parade of horribles preventing meaningful progressivity debates. He pragmatically admits that many of the measurement problems are likely to be too difficult to fully overcome. In such cases, he advocates articulating the assumptions that are made to address those problems. For instance, if imputed rent is not included in a measure of income, that omission should be made clear along with the probable impact of that omission.

These difficulties should not prevent action to ease the burden of determining the progressivity of the tax system; as Viswanathan puts it, “the perfect need not be the enemy of the good.” He concludes the article by arguing that one way to help the analysis is through earmarked taxes. Knowing exactly how, and maybe even who, tax revenue is spent on can clarify how money is redistributed among taxpayers. While this argument is undoubtedly correct, one does wonder just how many taxes would need to be earmarked to enable a broader discussion of progressivity within the tax system, and at what point too much tax revenue becomes earmarked such that the government is strained in its ability to support more general activities, such as defense or support for emergencies.

In framing the rules of the analysis of the progressivity of taxes, Viswanathan highlights an important issue for tax policy debates. Clarity and transparency are key to these debates, and too often discussions of vertical equity lack both. I certainly will be adding a few more caveats on my first day of tax class.

Here’s the rest of this week's SSRN Tax Roundup:

• Alagappan (Arumugam Pillai Seethai Ammal), Indian Tax Structure – An Analytical Perspective, 10 International Journal of Management 36 (2019)
• Agnishwar Basu (North Bengal), Mistrusting Trusts: A Study of Exit Tax on Trusts in India
• Richard M. Bird, The Income Tax in an Uncertain World: Pillar, Symbol, and Instrument, 67 Canadian Tax Journal 623 (2019)
• Robin Boadway (Queen’s), Rationalizing the Canadian Income Tax System, 67 Canadian Tax Journal 643 (2019)
• Micah Burch (Sydney), Extranational Taxation: Canada and UNCLOS Article 82, 67 Canadian Tax Journal 729 (2019)
• William H. Byrnes, IV (Texas A&M), Boiling Starbucks’ Roasting Down to the Essence of its Residual, Texas A&M University School of Law Legal Studies Research Paper No. 19-49
• Amir A. Fazel, Suing the Canada Revenue Agency in Tort, 67 Canadian Tax Journal 581 (2019)
• Calvin H. Johnson (Texas), Deficits by Tier: Payback of the 2017 Tax Act by Wealth, 164 Tax Notes Federal 1893 (2019)
• Eric A. Kades (William & Mary), The Charitable Continuum
• Jeffery M. Kadet (Washington), Notice 2019-30, 2019-2020 Priority Guidance Plan – Sourcing of Cloud Services Income
• Young Ran (Christine) Kim (Utah), Engineering Pass-Throughs in International Tax: The Case of Private Equity Funds, 56 San Diego L. Rev. 707 (2019)
• John Lester (Calgary), Finances of the Nation: Tax Expenditures in Canada — Historical Estimates and Analysis, 67 Canadian Tax Journal 755 (2019)
• Yvette Lind (Copenhagen Business School), Political (Tax) Equity in a Global Context – Some Initial Reflections on How Individuals May Indirectly Influence Tax Legislation and Public Spending In Sweden, Germany and the U.S., CBS LAW Research Paper No. 19-34
• Michael H. Lubetsky (Davies Ward Phillips & Vineberg), Income Tax Disputes Involving Loss Years: Pitfalls, Foibles, and Possible Reforms, 67 Canadian Tax Journal 499 (2019)
• Kevin S. Milligan (UBC), The Future of the Progressive Personal Income Tax: How High Can it Go?, 67 Canadian Tax Journal 693 (2019)
• James R. Repetti (Boston College), The Appropriate Roles for Equity and Efficiency in a Progressive Income Tax, 24 Fla. Tax Rev. ___ (forthcoming 2020)
• Nathan Sosner (AQR Capital Management) & Philip Balzafiore (AQR Capital Management), Lot Layering: The New Frontier for Hedge Fund Partnership Allocations
• Victor Thuronyi, A Supplemental Expenditure Tax for Canada, 67 Canadian Tax Journal 711 (2019)
• Robert van Brederode & Simon B. Thang (Thang Tax Law), Subsidies and Value-Added Tax: A Comparative Study of Law and Practice in Canada and the European Union, 67 Canadian Tax Journal 533 (2019)