Fiscal Federalism as Risk-Sharing: The Insurance Role of Redistributive Taxation

In addition to funding government and redistributing income, a redistributive tax-and-transfer system, and a progressive income tax in particular, provides insurance against the risk of uncertain future income. By providing for high taxes for high incomes, and low taxes, exemptions, and transfers for low incomes, a progressive income tax lowers the volatility of potential after-tax income relative to a lump-sum tax. This insurance function is distinct from the redistributive function of the system, since it provides a direct risk-mitigation benefit to the taxpayer himself, rather than simply redistributing income from one taxpayer to another. This article analyzes the question of at what level of government to assign the income tax role in a federal system, given both its redistributive and insurance functions. The standard view in the literature is that redistribution is best done centrally, and thus that an income tax is best used by the federal government, rather than by state governments. Yet recent work suggests that states can effectively have some role in redistribution. Income insurance, however, can be more effectively done by the federal government, because of its larger risk pool and better ability to handle revenue volatility. This article argues that states will, and likely should, use progressive income taxes as a tool of greater redistribution. At the same time, the insurance function of a progressive income tax can still be nationalized through policies that resemble re-insurance. In particular, this article looks at the idea of a multi-state rainy-day fund as a form of pooled state revenue insurance, as well as federal policies that may achieve some of the same benefits

Student Loans as Taxes

The growth of college tuition and the corresponding rise in student loan debt have become major issues of public importance. Total outstanding student debt is at least $1.3 trillion, and tuitions keep growing, even while we arguably need to invest more in higher education to add skills and grow our economy. Sen. Bernie Sanders, I-Vt., has made higher education reform a major part of his Democratic presidential campaign platform, proposing a new financial transactions tax to pay for large grants to states that offer free tuition to public universities. His opponent, Hillary Clinton, has proposed grants to states to offer ‘‘no-debt-tuition,’’ paid for in part by repealing several tax expenditures. These and other plans would essentially increase federal spending on higher education through expanded progressive taxation

Income-Driven Repayment and the Public Financing of Higher Education

This article provides the first comprehensive analysis in the legal literature of the federal government’s new income-driven student loan repayment programs, known as Income-Based Repayment and Pay As You Earn. In a set of gradual and little-noticed statutory and regulatory moves, the federal government, through these programs, has dramatically reshaped higher education finance in ways that schools, students, and even the government itself are only beginning to understand. Under IBR and PAYE, a student borrower pays no more than 10% of her discretionary income in loan service payments, and after a maximum of 20 years, the remaining debt is forgiven—for any borrower, regardless of degree, career, or debt load. This article argues that such an income-driven system is analogous to the federal government paying the up-front costs of higher education, but raising that money from a 10% “surtax” on the incomes of graduates. This is a huge change from the current mixture of debt-financed tuition, need-based grants, and moderate state subsidies. This framing raises important questions. Is this income-driven repayment structure appropriate? How tax-like and progressive are IBR and PAYE in fact, and can they be made more (or less) so? What are the risks and downsides of such a structure? This article claims that using a tax-like instrument such as income-driven repayment is well suited for higher education, given its economics, financial characteristics, and social benefits. In particular, the key difference between income-driven repayment and up-front need-based grants, such as Pell Grants, is that income-driven repayment makes a judgment of need based on ex post graduate income, rather than ex ante parental income. Based on this analysis, this article concludes with some novel suggestions for reform to PAYE

Taxation, Risk, and Portfolio Choice: The Treatment of Returns to Risk Under a Normative Income Tax

Many articles in the legal and economic literature claim that a pure Haig-Simons income tax cannot effectively tax investment income. This is because an investor can use leverage to gross up her investments in risky assets such that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risk-taking. This article argues, however, that while it is possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so. Central to any discussion of the effects of taxation on investment risk-taking is the meaning of risk itself. The central claim of this article is that a better conception of investment risk is the risk of loss and not merely the variance of returns. Applying this notion of risk—one that is well supported in the finance literature but new to the taxation-and-risk literature—to an investor’s portfolio choice question shows that an investor will not increase her investment in risky assets by enough to offset the tax. As a result, there is an effective tax on investment risk-taking under a normative income tax

Treasury Should Exclude Income From Discharge of Student Loans

There are several ways that a student loan borrower can have a federal student loan discharged. In some cases, that cancellation of student debt creates taxable income, but in others it does not. This Article argues that taxing cancellation of student debt undermines the purposes of loan discharge and income-driven repayment programs like IBR and PAYE. This Article further argues that, if Congress does not act to provide a clear exclusion, Treasury has sufficient statutory and common law authority to exclude that income, and that it should do so

The Missing Tax Benefit of Donor-Advised Funds

The second largest charitable organization in the country in terms of annual money raised is not the Red Cross, the Salvation Army, or the YMCA— it’s Fidelity Investments. The sixth largest is Charles Schwab Corp. Vanguard Group Inc. is No. 10. Needless to say, Fidelity, Schwab, and Vanguard are not running hospitals or soup kitchens. Rather, they are the three largest sponsoring organizations of donor-advised funds (DAFs). DAFs are accounts established by contributions from charitable donors to a sponsoring organization that pools and manages many different DAFs. The DAF then makes distributions to operating charities based on the advice of the donor. Because the sponsoring organizations are, by definition, described within section 170(c), contributions by a donor into a DAF are tax deductible. Importantly, the DAF need not make any distributions immediately for the original donor to receive the deduction. Because the donation is to the sponsoring organization itself, and the sponsoring organization is a charitable organization, the original gift is fully deductible

The Case for More Debt: Expanding College Affordability By Expanding Income-Driven Repayment

Income-Driven Repayment (IDR) for federal student loans is rapidly becoming the primary tool that the federal government uses to provide progressive funding to individuals to pay for college. Under these programs, borrowers can choose to pay back their loans as a percentage of income, with eventual debt forgiveness after 10-25 years. If administered well, these programs can make student loans affordable for everyone, regardless of income. In this symposium essay, I argue that for IDR to meet its goal of providing affordable higher education to everyone, the federal government needs to raise the individual borrowing limits on Direct Loans and issue substantially more debt than it does today. This perhaps counterintuitive proposal—help students by increasing debt—follows from the observation that an IDR student loan is conceptually not at all like traditional debt and is more akin to a tax instrument. If a borrower promises only to pay a percentage of income, the nominal amount of the debt is not as crucial. Furthermore, if a student cannot cover net tuition with federal student loans, the student may be forced to use private loans or to work excessively, which can lead to worse outcomes

Don\u27t Forget the Standard Deduction

The presidential candidates this campaign season are a diverse group with a wide range of tax policy proposals, but they agree unanimously about one thing: the need to limit itemized deductions. Sadly, however, none of their proposals tackles how limits on itemized deductions would affect the other side of the equation—the standard deduction — which is also very much in need of reform

The Definitions of Income

What is income? It’s a seemingly simple question that’s surprisingly hard to answer. Income is the basis for assigning tax burdens, for distributing transfers, and for broader normative issues of inequality and justice. Yet we lack a shared conception of income, and a pure, rigorous definition of income is impossible. In this Article I review the intellectual history of the income concept among tax and fiscal theorists to show the difficulty of the problem, and also to show that some important debates about what’s proper under an income tax can be explained instead as arguments over competing income definitions that necessarily incorporate policy choices. These insights are applied to more modern questions, like the role of tax expenditure analysis and optimal income tax theory. I also perform—for the first time in the literature—a close examination and comparison of 12 different income definitions used by the federal government for different purposes. This examination illustrates that there is wide range of income concepts actively in use, but that the measure of income for tax purposes has a prominent and growing role. This Article concludes that income is not a pure, external concept, but actually a constructed concept that necessarily embodies policy, and therefore political, goals. The differences between the income concepts and definitions examined here result directly from the policy goals of the various agencies, analysts, and scholars using those concepts. Therefore, the increasing reliance on the measure of income for tax purposes risks erroneously exporting what are essentially tax policy decisions into non-tax areas, such as transfer policy, health care subsidization, higher education grants and loans, and broader discussions on income inequality and economic justice

Why a Wealth Tax is Definitely Constitutional

Wealth tax reform proposals are playing a major role in the 2020 presidential campaign. However, some opponents of these wealth tax reform proposals have claimed that a wealth tax would be unconstitutional. Other prominent critics have argued that wealth tax reforms are probably unconstitutional, so that, after review by the courts, the “likeliest outcome is that a wealth tax will raise exactly zero dollars.” These claims are wrong. More precisely, these claims are wrong conditioned on wealth tax legislation being carefully drafted so as to ensure its constitutionality. As we will explain in this essay, properly drafted, wealth tax reform legislation is definitely constitutional and thus capable of raising substantial revenues to fund new spending programs. Constitutional scholars disagree about whether a new federal wealth tax would need to be uniform or apportioned in order to be constitutional. We explain how wealth tax legislation could be drafted to ensure its constitutionality regardless of how the Supreme Court ultimately decides on this question. In particular, we explain how Congress could design an apportioned federal wealth tax made equitable through the use of a fiscal equalization program, and could legislate this as a fallback option in case the Supreme Court were to rule against an unapportioned federal wealth tax