Weekly SSRN Tax Article Review And Roundup: Saito Reviews Wallace’s A Democratic Perspective On Tax Law

This week, Blaine Saito (Northeastern; Google Scholar) reviews a new work by Clint Wallace (South Carolina; Google Scholar), A Democratic Perspective on Tax Law, 98 Wash. L. Rev. __ (2023).

Frequently, our tax discussion, and for that matter most of our legal-policy discourse, focuses on economics. In tax, we talk about efficiency often as the first among equals in triad of principles that also include equity, and administrability. Frequently too, our concepts of equity and administrability focus a lot on economics costs and benefits and distribution tables. But too often we do not talk about the concepts of democracy and how the tax system can foster or hamper it. In his article, A Democratic Perspective on Tax Law, Clint Wallace turns our attention on both the existing writings on democracy and tax and adds that for tax policy, there should be an analysis on the basis of democratic ideals that we use to judge these policies. Democracy should stand with efficiency, equity, and administrability as a separate criterion for analyzing the tax system.

First, Wallace shows how efficiency, equity, and administrability currently have democratic blind spots. For example, in efficiency analysis, people ignore democracy in creating social welfare functions, they adopt a libertarian view where the market precedes from nature, or they fail to understand the governing context in which rules are implemented. Equity often focuses solely on distributional concerns of money and not power dynamics. Administrability is more concerned about taxpayer rights against a dangerous government. And even when talking about the process for making policy, democracy is often not considered with a few exceptions that Wallace cites. Democracy, then, rarely appears in our discussions.

Wallace then makes a positive case as to why we should include democracy in analyzing tax policy and policymaking processes. Ideally, the tax system should bolster and further democratic goals and values. He outlines three specific areas to examine with regard to democracy: promoting faith in democracy, supporting participation, and shaping political economic life.

On promoting faith in democracy, Wallace notes a few ways that the tax system can help or hurt. First, the tax system itself has a communicative value. What the tax system does to its people, from requiring onerous filing when the IRS already has information, to how tax burdens are distributed, communicates key values to people. The operation of the tax system and the capacity of the government can also affect people’s faith in both the tax system and overall government operations, especially since it is a part of the state with which most people interact.

With respect to participation, the tax system can aid in providing democratic voice. It can give voice by providing a form of control over the government and its institutions. It can also give voice, perhaps unequally, in determining who can choose to structure their tax liability. It can also affect participation by encouraging or discouraging democratic capacity. A good tax system provides the government resources that it uses to prepare citizens in education and has other policies within it that further that goal too. But matters like the mortgage interest deduction and the means of favoring places with high property tax bases for educational spending shows the tax system hindering this part of participation.

On the issue of political economic life, the tax system can affect it in two ways. The first is that it can encourage or discourage nondomination. While the theory of what is domination is nuanced and contested, at its core, domination is about exercising power over others. The focus here then is how the economic matters can sometimes cross into the political spheres and assist or harm democratic decision-making. Tax can thus aid or hamper that with respect to distribution and its interaction with political power. Second, the tax system can also affect this political economic life by managing the economy. Taxes can affect issues of the allocation of capital, employment, and almost any part of society. The question here is does the tax system, in this management, promote values of freedom, equality, and dignity.

Wallace then takes these ideas and applies it to show how proposals for wealth taxation are democracy enhancing. Many have pointed out that the allocation of vast sums of wealth has distorted our economic and political life. Those with more wealth have outsized power and influence in all sorts of processes. Those too with wealth help put to life the concept that only the little people pay their taxes because they can defer taxation through avoiding realization or other structures until they die. The wealth tax can support faith in democracy by showing that taxes apply to all people. It can ensure participation by providing some funds to pay for things like universal pre-school and forcing the ultra-wealthy to opt-in by reducing the ability to defer taxes by avoiding realization. Finally, it aids in shaping political and economic life by trying to limit domination. As discussed above, the wealthy use their funds to further their political goals. And wealth, even if not used to influence politics, creates certain powers and honor within society.

Overall, Wallace helps us to create the outlines of a new democratic criterion for analyzing tax policy. He explicitly does not, for good reason, define completely concepts like democracy and nondomination, but does encourage us tax people to have these discussions and grapple with this debate in democratic theory. That invitation to contemplate and wrestle with these concepts is welcome and needed. We should work with the difficult concepts of democratic theory, engage with theorists in this area, and seek to apply them to our analyses of taxation.

Additionally, Wallace does a good job at pushing back on a problem that has grown in taxation, other areas of law, and in policymaking, which is the dominance of economic thought. In a careful way, Wallace provides us with an important pushback against letting economics always get a say. Almost all of our three criteria for tax policy now have at its core, an economic idea. But we often do that without thinking about the implications for broader society as well as failing to understand the underlying assumptions there. Furthermore, among the criteria, the turning of efficiency as the first among equals is problematic. Wallace, by writing and adding his voice, urges us to think about how we all subtly import these ideas into our thought.

The piece then should serve as a call to all of us to think more deeply about how tax policies and processes affect our broader society and democratic goals. It should make us focus substantively on policies that create positive outcomes in that direction, and process-wise on procedures that advance democratic goals. That, in turn, would help tax discussion be more relevant and rich.

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

• Timothy Meyer (Duke), Consumption Governance: The Role of Production and Consumption in International Economic Law, 49 B.Y.U. L. Rev. ____ (forthcoming 2024) (posted July 13, 2023).
• Edward A. Zelinksy (Cardozo), (Some) ESG Supporters Should Oppose the DOL’s Tie-Breaking Rule, N.Y.U. Rev. of Employee Benefits and Executive Compensation ___ (David Pratt ed., 2023 ed.) (posted July 13, 2023).
• Douglas A. Kysar (Yale), An Eco-Pragmatic Approach to Inequality and Regulation (posted July 11, 2023).
• Jeremy Bearer-Friend (George Washington), Race Based Tax Weapons, 14 U.C. Irvine L. Rev. ___ (forthcoming 2024) (posted July 11, 2023).
• Robert W. McGee (Fayetteville State, Accounting), Monica Violeta Achim (Babes-Bolyai University, Faculty of Economics and Business Administration), How Serious is Tax Evasion? A Survey of Polish Opinion, The Ethics of Tax Evasion, Country Studies ___, (R.W. McGee, J. Shopovski eds., forthcoming 2024) (posted July 11, 2023).
• Radim Boháč (Charles University in Prague - Faculty of Law), Michal Radvan (Masaryk University, Faculty of Law), Karel Brychta (Brno University of Technology), Chapter 7: Czech Republic, in Taxation of Companies in Economic and Financial Distress 163 (E. Kristofferson ed., 2023) (posted July 8, 2023).
• Laura Snyder (Association of Americans Resident Overseas (AARO)), Can Extraterritorial Taxation Be Rationalized?, 76 Tax Law. 535 (2023) (posted July 7, 2023).