Sugin: Proxy Taxes—Taxing The Wrong Person Can Be The Right Policy

Linda Sugin (Fordham; Google Scholar), Proxy Taxes: Taxing The Wrong Person Can Be the Right Policy, 44 Va. Tax Rev. ___ (2025):

Congress seems unable to fix the inequities and inefficiencies that riddle the tax law. This article suggests such a new strategy for building a better tax system that Congress should find politically possible. It proposes taxing the wrong taxpayer for the right reasons-to raise revenue and improve fairness. It introduces a conceptual and theoretical framework for provisions that are already in the Internal Revenue Code, explaining why they should be understood as examples of "proxy taxes," and proposes that proxy taxes can solve many intractable problems in the law.

“Proxy taxes,” as defined in this article, impose liability on taxpayers who do not have taxable income in the traditional sense. But those proxy payers do have ability to pay and are connected, in some way, to income earners who pay insufficient or no tax on that income. Given alarming levels of inequality and the political roadblocks to raising taxes on income in a straightforward way, policymakers should embrace proxy taxes as a second-best, flexible solution to a pressing tax justice problem. This article argues that proxy taxes contribute to a more comprehensive income tax system, despite their departure from classic income tax principles, and can also be more efficient than alternative taxes imposed on income.

While accepting the corporate governance critiques in the literature, the article endorses section 162(m)’s limit on the deduction for executive compensation as a great proxy tax on high labor incomes. It also commends the Inflation’s Reduction Act’s tax on corporate stock repurchases as a proxy tax on capital income. With the framework for proxy taxes established in these examples, the article proposes that Congress extend proxy taxing to address a variety of enduring problems in the Code. It offers proxy tax proposals to increase marginal income tax rates on high salaries, abrogate the benefit of the step-up in basis at death, and reduce the windfall from contributing appreciated property to charity. Given that Congress seems capable of increasing taxes only in non-transparent ways, it should embrace proxy taxation as a tool for creating a more just tax system.

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