Liberalism and Ability Taxation
Hasen, David, Texas Law Review
Recent tax scholarship has embraced the idea of individual endowment taxation, or taxation of human abilities, as an approach to ideal tax theory. Under endowment taxation, individuals are taxed according to their native abilities to command resources, rather than according to any actual index of goods or expenditures, such as income, consumption, or wealth, that otherwise might be thought relevant to the assignment of tax burdens. This Article argues that endowment taxation is incompatible with political theories that might broadly be described as "liberal," to the extent such theories support redistribution. It also argues that limited forms of endowment taxation may be available under liberal theories to the extent such theories operate on a payment-for-services-rendered conception of taxation. Turning to consequentialist theories, the Article suggests that under a wide array of assumptions, lump-sum taxes such as an endowment tax are not optimally efficient. Lastly, it argues that even where they represent the most efficient available alternative, lump-sum taxes generate social costs if they compel individuals to work in order to meet tax obligations.
Recent tax scholarship has embraced the idea of individual endowment taxation, or taxation of human abilities, as an approach to ideal tax theory.1 Under endowment taxation, individuals are taxed according to their native ability to command resources, rather than according to any actual index of goods or expenditures, such as income, consumption, or wealth, that otherwise might be thought relevant to the assignment of tax burdens. The individual with a greater capacity to command resources will be taxed more heavily than the individual whose capacity is low, and in both cases tax will be assessed without regard to the income or wealth that persons actually would earn or receive during their lifetimes in the absence of an endowment tax burden.
Taxation of endowments, even as a theoretical ideal, is surely counterintuitive. It would entail the imposition of tax without regard to economic resources available to the taxpayer and without the tacit consent to tax that might be inferred from an individual's engaging in activities that produce such resources. It presupposes the existence of a set of native faculties whose market value can be ascertained apart from their circumstances, yet it is not clear that this concept is coherent or defensible. And it treats each individual's talents as a kind of collective property, available for others' use without the consent of the person whose prima facie claim to own the talents seems clearly to be stronger than anyone else's claim. All of these theoretical problems, to say nothing of the host of practical difficulties that would attend any effort to implement the ideal, seem to suggest that endowment has little to recommend itself as either a tax base or a theory of taxation.2
Despite these and other objections, the endowment ideal has enjoyed sustained and even expanding support across a wide spectrum of scholarly approaches to taxation. Its proponents include consequentialist theorists who have argued that it permits the most effective redistribution of the capacity to generate welfare;3 those arguing from a liberal perspective who claim that differences in fairly guaranteed opportunities, and not in actual wealth or income, are the appropriate basis on which to differentiate tax burdens;4 and those who find in endowment a purified form of the income concept.5 While all acknowledge that endowment taxation represents a merely theoretical ideal, they also argue that it represents a highly relevant ideal-one to be taken seriously for purposes of identifying the inequalities that we believe matter in assigning different tax burdens to different persons.
As the discussion below makes clear, the implications of the argument are profound. The theory of the ideal tax base does not have ramifications only for abstract accounts of the proper scope of taxation in an ideal world; it plays a critical role in live issues of tax policy as well. …