One of the truly great advantages of serving as a visiting professor at another institution is the chance to become better acquainted with tax colleagues. I'm blessed here at Boston College with a wonderful group of colleagues, not least of which is Jim Repetti.
Jim wrote an important article in 2001 about the negative impact of wealth concentration. He concluded that a reasonable estate tax is an important institution to sustain democracy. The article, titled "Democracies, Taxes and Wealth" is available at this link on SSRN. Here's the abstract.
This article demonstrates why wealth concentration matters and why the tax system should be used to help control wealth concentration. It shows that wealth concentration appears to be related to slow economic growth because of the lack of opportunities. It also shows that wealth concentration adversely affects the democratic process. It argues that because inheritances represent approximately fifty percent of wealth, wealth transfers should be taxed so long as the tax provides benefits that outweigh any assoiated harms. Using the current estate tax as a case study, the article concludes that a wealth transfer tax raises significant revenues and helps curb upward spiralling wealth concentration. Moreover, contrary to what has commonly been asserted, empirical studies generally show that the tax does not discourage savings.
Readers will no doubt recognize a good bit of similarity with this blogger's thoughts on this issue. I wish we could get Senator Baucus and the other members of Congress who are so intent on eviscerating the estate tax in favor of the ultra-wealthy (who are the only ones who bear it at this point anyway) to read this and pay attention.
This year, Jim has developed his theory about the importance of proper tax theory to democracy even further, in Democracy and Opportunity: A New Paradigm in Tax Equity, 61 Vanderbilt L. Rev. (forthcoming 2008). This is a wonderful article that reconsiders much of prior thinking about fairness in tax (and does not slight efficiency, either). What it accomplishes is a clear grounding of tax fairness in the democratic institution that our tax system is intended to support. Here's how Jim describes his approach.
Tax policy has ignored the necessity of first identifying equity goals appropriate for a just government and then designing a tax system to help achieve those goals. This article proposes that the principal equity goal underlying a just government is the creation of equal opportunities for all citizens to achieve self realization, i.e. to maximize their potential. However, a tax system should not merely be evaluated for its contribution to achieving equal opportunity for self realization. A tax should be designed to achieve equal opportunity for self realization as one of its principal goals. Viewing equal opportunity for self realization as a design issue leads to the identification of another principle that is foundational—the promotion of democracy. Both political philosophy and empirical literature suggest that equal access to the electoral process and participation in the community must exist in order for equal opportunity for self realization to exist. Thus, the turtle lying at the bottom is equality of opportunity—equality of opportunity to maximize self realization and equality of opportunity to participate in the political process.
He then methodically sets about establishing that having this goal as a foundational concept for the design of a tax system incorporates much of the understanding that was achieved by defining equity in terms of benefits received or ability to pay, while providing a fully reasoned concept of fairness that can guide the choice of appropriate base and rate structure for the tax system. Along the way, he dispels some of the myths about consumption taxation that have been put forward as "consensus" views of tax academics (even though there is no clear consensus within academe that consumption taxation is preferred over income taxation). Again, Jim's own words in describing the relative advantages of an income over a consumption tax system are insightful.
To illustrate the importance of designing a tax system based upon these principles of equity, this article revisits the debate about the desirability of an income tax versus a consumption tax. It is well understood that in the short-run democracy is an inefficient form of government, but that in the long-run it is the most successful. The same is true for an income tax. Advocates of a consumption tax assert that investment income should not be taxed in order to maximize efficiency. However, an income tax that burdens investment income makes contributions to the effective operation of our democracy and to the creation of equal opportunity that are far more important than any efficiency gains provided by a consumption tax. Indeed, as discussed in this article, the relative efficiencies of the two types of tax systems, while clear in an idealized world, are far less clear in the real world. A tax system designed to maximize opportunities for self realization and participation in democracy provides benefits that have previously been ignored in evaluating tax systems. In contrast, a consumption tax designed to deal with transition and distributive issues likely to arise in the real world may be no more efficient than the income tax it would replace.
I highly recommend this important article for all those who care about establishing a firm fairness rationale for the tax system that is grounded in concern for a sustainable democratic institution.
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