Tax Theory & Feral AI

This essay is a sci-fi thought experiment about the significance of personhood in income taxation, meant to explore the validity of currently prevailing justifications for the tax

Why a Federal Wealth Tax is Constitutional

The 2020 Democratic presidential primaries brought national attention to a new direction for the tax system: a federal wealth tax for the wealthiest taxpayers. During their campaigns, Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) both introduced proposals to tax the wealth of multimillionaires and billionaires, and to use the revenue for public investments, including in health care and education. These reforms generated broad public support—even among many Republicans—and broadened the conversation over the future of progressive tax reform. A well-designed, high-end wealth tax can level the playing field in an unequal society and promote shared economic prosperity. Critics have argued, however, that a wealth tax would be unconstitutional because of the Constitution’s apportionment rule, which requires certain taxes to be apportioned among the states according to their populations. These critics advance maximalist interpretations of the apportionment rule and reconstruct the rule as a significant limit on Congress’s constitutional taxing power. In response to these objections, this brief explains why these critics misinterpret the role of the apportionment rule, and why the Constitution grants Congress broad taxing powers that allow for a wealth tax, whether it is apportioned or not. The maximalist interpretations misapprehend the role of apportionment in the constitutional structure, and improperly elevate a peripheral rule into a major barrier to tax reform. This brief explains why constitutional history and Supreme Court precedents instead support a measured interpretation of the apportionment rule. This measured interpretation preserves apportionment’s role in the constitutional structure—and does not read the provision out of the Constitution—but also does not improperly inflate the rule into a fundamental limitation to Congress’s taxing power. Under this interpretation, the Constitution allows Congress to enact an unapportioned wealth tax but would still require apportionment for some other forms of taxes, such as a tax on real estate alone. This brief offers a descriptive analysis of the constitutional provisions and consequently describes how any member of the Supreme Court should evaluate a federal wealth tax, regardless of the member’s personal motives or policy preferences. Discussions of the constitutionality of a wealth tax sometimes conflate this descriptive analysis—as to what the Constitution in fact does and should require—with a predictive analysis of how particular members of the current Supreme Court might rule. Although this brief primarily offers a descriptive analysis of the constitutional provisions and what they require, the final section addresses the separate question of whether Congress should enact a wealth tax at a time when particular members of the Supreme Court may rely upon maximalist arguments to strike it down. A federal wealth tax warrants sustained and careful debate on the merits: how it should be designed, how it will affect economic activity and tax revenues, and how it should interact with other taxes. This important debate, however, should not be short-circuited by reflexive arguments that a wealth tax would be unconstitutional. Rather, voters and legislators should determine the scope and design of a federal wealth tax, as the Constitution ultimately requires

Does the Tax Code Favor Robots?

In recent months, a number of scholars and commentators have articulated versions of the following argument: (1) U.S. tax law favors capital over labor;1 (2) Robots are capital; 2 (3) Therefore, U.S. tax law favors robots over labor. 3 Three implications tend to be drawn from this syllogism: (a) that U.S. tax law leads to inefficient investments in automation;4 (b) that automation—because it is capital-intensive and capital is tax-favored—will result in a reduction in tax revenues;5 and (c) that policymakers should respond to the automation trend either by imposing explicit taxes on robots or by raising taxes on all capital.6 This short essay seeks to illustrate why the line of argument above is misguided. First, the claim that U.S. tax law is biased toward capital rests entirely on an unstated (and uncertain) normative premise: that the United States should tax income rather than consumption. If an income tax is the baseline, then U.S. tax law exhibits a pro-capital bias; if a consumption tax is the baseline, then U.S. tax law exhibits an anti-capital bias. Which baseline we choose depends on normative choices that claims of capital-favoritism tend to occlude. Second, robots do not only (or even primarily) represent “capital”; they also embed the labor of engineers and others. The labor of robot makers is often taxed at unfavorable rates relative to the labor of the workers whom automation threatens to displace. Third, the idea that U.S. tax law incentivizes firms to replace human workers with robots rests on doubtful logic, and the claim that automation will erode the tax base finds little support either. This essay is not an argument against capital income taxation or a defense of the current Code, which does tax capital income but not all that much. I believe, though, that the case for capital income taxation will be stronger if it is based on firm foundations rather than on dubious claims of robot favoritism. The essay also is not a full treatment of the arguments for and against taxing capital. Its objective is to evaluate one such argument and to show why it is unpersuasive. Part I of the essay examines the claim that the U.S. tax system favors capital over labor. Part II turns to the question of whether robots represent capital or embedded labor. Part III considers the case for explicit taxation of robots or broader taxation of capital once illusions about the tax code’s pro-robot bias are cleared away

How to Measure and Value Wealth for a Federal Wealth Tax Reform

Over the last several decades, wealth inequality has exploded, warping economic outcomes and limiting opportunity—for individuals and for the US at large. Sky-high income inequality and runaway income gains for the nation’s highest earners compound that wealth inequality and are insufficiently taxed under the current tax regime. Further, wealth in the US has always been heavily skewed by race. Since the country’s founding, US laws and customs have prevented Black and brown people from receiving fair wages and accruing assets, thereby creating and perpetuating today’s massive racial wealth gap. While our existing tax systems are ill-equipped to tackle these challenges, a well designed, high-end wealth tax could both help level the playing field and promote shared economic prosperity. The existing US income tax regime is cash realization–based and thus mostly takes a deferral-based approach to valuation of the economic income derived from wealth accumulations—an approach to valuation that can be politically fragile and extremely vulnerable to gaming. To achieve meaningful progressive taxation of the very wealthy, we should instead value and tax income and wealth in real time. Encouragingly, this strikes many as an obvious solution, and governments around the world are now considering wealth tax proposals. In the US, the 2020 presidential campaigns of Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) brought the idea to the national stage. Their proposals to tax the wealth of multimillionaires and billionaires generated broad public support—even among many Republicans—and broadened the conversation over the future of progressive tax reform. Fundamental to the design of a wealth tax is how to measure and value taxpayers’ wealth. This report outlines a practical approach to doing so that can form the basis of federal wealth tax legislation. In general, the proposed wealth tax would value assets at their fair market value, the notional price at which the asset would voluntarily change hands between an informed buyer and seller, both operating at arm’s length. Beyond this general rule, assets and liabilities that are hard to value would be subject to additional rules for measuring fair market value. As this report will explain, although there are many difficulties involved in designing a valuation and measurement system, these difficulties are not inherently more challenging when it comes to designing and implementing a wealth tax than they are for designing and implementing an income tax. For either an income tax or a wealth tax, there is no perfect valuation or measurement system, and trade-offs must be made amongst potentially conflicting goals. Measuring wealth can sometimes be complicated and will require additional funding and capacity for the Internal Revenue Service (IRS) or other additional enforcement mechanisms, along with sometimes complex-seeming rules—but these administrative costs are low compared to the revenue at stake if valuation and enforcement are not taken seriously. Additionally, so long as a wealth tax is designed with a high exclusion threshold, only the wealthiest taxpayers—those with complicated wealth holdings and excellent legal and accounting help— would face any thorny valuation issues or compliance obligations. This report will explain the best approaches for valuing the most important categories of taxpayers’ wealth, both for forms of wealth that are relatively easy to value and for forms of wealth that are more difficult to value

Solving the Valuation Challenge: The ULTRA Method for Taxing Extreme Wealth

Recent reporting based on leaked tax returns of the ultrarich confirms what experts have long suspected: for the wealthiest Americans, paying taxes is mostly optional. Some of the country’s richest have reported annual taxable incomes that would be modest for a schoolteacher, even as the share of wealth held by the top .1 percent is at its highest in nearly a century. Experts have long understood that one problem sits at the roots of many of the tax system’s failures to reach the very rich: valuation. Because it is difficult to appraise complex or unique assets, modern tax systems instead wait until an asset is sold to impose tax. In combination with a U.S. rule that wipes away income tax on inherited profits, and a highly porous estate tax system, this “realization” approach has deeply undermined U.S. efforts to tax extreme wealth. This Article proposes a new approach: governments should take payments from the wealthy in the form of notional equity interests, which we call unliquidated tax reserve accounts (“ULTRAs”). Simply put, the ULTRA is economically equivalent to a government claim on a portion of the stock of a business, but because it is “notional,” it does not provide the tax authority with any governance rights or minority shareholder protections. Because the ULTRA represents a set share of an asset, whatever that asset’s worth, it does not require valuation. We explain how the ULTRA proposal builds on existing components already in use by wealth and income taxes around the globe, as well as on prior academic proposals. By combining select features from predecessors, the ULTRA addresses many of the shortcomings those tools face individually. For example, unlike the “retrospective” systems proposed by the economists Alan Auerbach and David Bradford, the ULTRA method ensures that taxpayers who expect to outperform the market with their investments will still have no incentive to delay paying tax. We then set out a variety of ways in which ULTRAs can be used to close the loopholes that wealthy taxpayers use to minimize their tax burdens. Most obviously, our proposal helps to make an annual tax on extreme wealth viable, and we detail how the ULTRA features in our proposal, developed more comprehensively elsewhere, for a state-level wealth tax. ULTRAs can also be used to reform the income tax system, most ambitiously as in the recent Billionaires Income Tax reform proposals for eliminating the realization approach for the very rich. We also show that valuation is at the core of many other common tax dodges, and we detail ways that ULTRAs can be used to curtail them

A Democratic Perspective on Tax Law

As democracies around the world have faltered, legal scholars in fields as diverse as election law, labor law, and administrative law have turned to tax law to repair and support democratic governments. Taxation offers a toolset well-equipped to address concerns raised by democratic theorists focused on the conditions that shape a democratic community and help it to flourish. Tax laws can rectify social dynamics characterized by economic inequality and can help establish and strengthen civic institutions, among many possible interventions. But legal scholars evaluating and designing tax policies generally focus on the standard normative criteria of efficiency, equity, and administrability, with little specific regard for democratic concerns. This separation from democratic theory has left tax law scholars ill-equipped to respond to calls for help from more democracy-focused fields of law. Thus, tax scholarship mostly has not engaged with the increasingly important project of strengthening democratic governance. This Article argues that democracy should be a more central consideration in designing and evaluating tax laws in a democratic system of government, exploring a set of democracy criteria that can bolster the standard normative criteria used to evaluate tax policy. The democracy criteria considered here ask: Does a change in tax rules strengthen or undermine democratic governance? This Article draws on democratic theory to identify pressure points where taxation might shape democracy, building on work by tax scholars who have tried to integrate democratic values into the standard criteria. I make the case that democratic considerations should not be subordinated to other criteria, but rather should stand on their own. I apply the democracy criteria to wealth tax proposals, showing how a democratic perspective illuminates a contemporary debate in U.S. tax policy. Approached in this way, a democratic perspective on tax law and policy can facilitate tax responses—in scholarly discourse and in policy prescriptions—to current challenges facing democracies around the world, answering the calls of scholars in other fields who (appropriately) view tax rules as sites of important potential interventions to shore up democracy

The Elephant Always Forgets: Tax Reform and the WTO

The “Tax Cuts and Jobs ACT” (TCJA) enacted on December 22, 2017, includes several provisions that raise WTO compliance issues. At least one such provision, the Foreign-Derived Intangible Income (FDII) rule, is almost certain to draw a challenge in the WTO and is likely to lead to another US loss and resulting sanctions. This outcome would be another addition to the repeated losses suffered by the US for export subsidies from the 1970s to 2004, which led to the imposition of sanctions and the ultimate repeal of the offending regime. The important question for 2018 and beyond is whether the Trump administration and its Congressional allies will react to such a loss in a similar fashion as the Bush administration did in 2004, or whether it will defy the WTO, with potential far reaching consequences for the world trade order

How Terrible Is the New Tax Law? Reflections on TRA17

Overall, TRA17 is not much worse than TRA86 or TRA14. It increases the deficit, but not by an impossible amount; it is distributionally skewed, but less so than is usually assumed; and its details are not terrible (on the international side they are a big improvement over prior law). There is one big problem, the pass through provisions, and we can only hope that as its horrible implications unfold it will be a prime candidate for repeal

A Constitutional Wealth Tax

Policymakers and scholars are giving serious consideration to a federal wealth tax. Wealth taxation could address the harms from rising economic inequality, promote equality of social and economic opportunity, and raise the revenue needed to fund critical government programs. These reasons for taxing wealth may not matter, however, if a federal wealth tax is unconstitutional. Scholars debate whether a tax on a wealth base (a “traditional wealth tax”) would be a “direct tax” subject to apportionment among the states by population. This Article argues, in contrast, that this possible constitutional restriction on a traditional wealth tax may not matter. If the Court struck down a traditional wealth tax, Congress could instead tax wealth by adjusting a taxpayer’s income tax liability on account of her wealth. This Article describes three general methods for making this adjustment (collectively, “Wealth Integration” methods). A taxpayer’s wealth could affect her taxable income base (the “Base Method”), the applicable rate schedule (the “Rate Method”), or the availability of credits against tax (the “Credit Method”). Wealth Integration methods could replicate the economic effects of a traditional wealth tax but with an intrinsically different constitutional analysis. The Court could strike down Wealth Integration methods only by overruling settled prior precedent, invalidating many current features of the income tax, and fundamentally restricting Congress’s power to tax income under the Sixteenth Amendment. Finally, the possibility that Congress could instead tax wealth through Wealth Integration methods provides a new argument why the Court should uphold a traditional wealth tax. Otherwise, the Court would have to choose between fundamentally restricting the Sixteenth Amendment—and jeopardizing the income tax as we know it—or distinguishing between economically similar taxes on the basis of their formal label while still allowing Congress to tax wealth and diminishing the effect of the apportionment requirement as a restraint on Congress’s taxing power