taxing income and wealth · 2019. 4. 11. · draft – october 27, 2017– please do not cite or...

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TAXINGINCOMEANDWEALTH

AriGlogower*

Abstract

Risingeconomicinequalityhasledscholarstoreassessthebaseforprogressivetaxationandtoarguethatwealthshouldbetaxedinadditiontoincome.ThisArticlebeginsbygroundingtheargumentfortaxingwealthasafactorineconomicinequalityin the relative economic power theory used by political scientists to explain howinequalitygeneratessocialandpoliticalharm.Fromthisstartingpointoftherelativeeconomicpowertheory,thisArticlemakestwoprimarycontributionstotheliteratureonwealthtaxation. First,thisArticledemonstratesbasic limitationsofproposalsforseparate periodic taxes on income and wealth as factors in economic well‐being.Separateincomeandwealthtaxescannotconsistentlycomparetaxpayersonthebasisoftheirtotaleconomicwell‐beingduringthetaxingperiodandwillfavorordisfavortaxpayersdependingwhethertheireconomicwell‐beingresults from income,wealth,oracombinationthereof.

This argument has additional implications for the choice between taxingwealthorincome,andthelimitationsofboth. Fromtheperspectiveofaperiodictaxon economicwell‐being, awealth tax is not replicable by a tax on capital incomeearnedfromwealth.Awealthtaxthataccountsforataxpayer’sentirestockofwealtheach period overtaxes wealth holders relative to labor income earners,whereas acapital income tax under‐taxes wealth holders relative to labor income earners.Finally, from this perspective wealth does not factor equally in each taxpayer’seconomic well‐being, which will vary with the number of periods over which thewealthmustbespread.

ThisArticle then introduces a new base for progressive taxation,which is acombined base of economicwell‐being derived from both income andwealth. Thisapproach first re‐characterizeswealthand capital incomeasanannuity value (the“wealth annuity”), reflecting both capital income earned during the period and aportionof the taxpayer’swealthprincipal. Thewealthannuity is thenadded to thetaxpayer’s labor income for the period to yield the combined base, which reflectseconomicspendingpowerduringthetaxingperiod.Thiscombinedbaseallowsthetaxsystem tocompare taxpayerswithdifferent levelsof incomeandwealth,and tailorstheprogressivetaxbasetothetheorizationofhoweconomicinequalitycausessocialandpoliticalharm.

*AssistantProfessor,TheOhioStateUniversityMoritzCollegeofLaw.


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TableofContents

I.Introduction...........................................................................................................................3

II.WhyTaxWealth?.............................................................................................................10A.JustificationsandObjections.................................................................................................10B.RelativeEconomicPowerTheory........................................................................................11

III.TaxingIncomeandWealth.........................................................................................14A.TwoFunctionsoftheProgressiveTaxBase.....................................................................15B.TheDefinition(s)of“Income”and“Wealth”....................................................................181.Income.......................................................................................................................................................192.Wealth.........................................................................................................................................................20

C.TaxingIncomeorWealth........................................................................................................211.TaxingIncome.........................................................................................................................................212.TaxingWealth..........................................................................................................................................223.TaxingWealthbyTaxingCapitalIncome.....................................................................................25

D.TaxingBothIncomeandWealth..........................................................................................27

IV.ACombinedBaseofIncomeandWealth................................................................29A.TheWealthAnnuity..................................................................................................................30B.TheCombinedBase...................................................................................................................32C.Real‐WorldConsiderations....................................................................................................351.ObservingandMeasuringIncomeandWealth.........................................................................352.NonperiodicIncome.............................................................................................................................363.UncertainLifeExpectancy..................................................................................................................384.Exemptions..............................................................................................................................................38

D.ContrastedwithOtherTaxBases.........................................................................................391.AnEstateorInheritanceTax.............................................................................................................392.AConsumptionTax..............................................................................................................................41

E.AdditionalObjectionstoTaxingWealth............................................................................411.PenalizingChoice..................................................................................................................................422.IncentivesandEfficiency...................................................................................................................43

V.Conclusion..........................................................................................................................45


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I.Introduction

As Congress and the President pursue tax reform, two pressing challengesconfrontthetaxsystem.First,thefederalgovernmentrequiresadditionalrevenueto fund current programs; to make new public investments in infrastructure,healthcare, and education; and to service the national debt. An estimated $380billion in additional revenue is required just to stabilize the federal debt at itscurrentshareofGDP.1Atthesametime,inequalityofbothincomeandwealtharerising,withbothmeasuresapproaching levels lastseen inthe1920’s, in theyearsleadingup to theGreatDepression.2 Excessive inequalityweakens the economy,3threatensdemocraticgovernance,4andstifleseconomicopportunityandmobility.5

Thesetwoconcerns—theneedtoraiserevenueandtoconstraininequality—have led scholars to reassess the base of progressive taxation and to argue thatwealth should be taxed in addition to income.6 A general line of argument in the

1 Cong. Budget Office, The 2017 Long‐Term Budget Outlook 22 (2017),https://www.cbo.gov/publication/52480.Stabilizingthenationaldebtatits50‐yearaverageof40%ofGDPwouldrequireadditionalrevenuesof$620billionin2018.Id.at29.2SeeThomasPiketty,EmmanuelSaez&GabrielZucman,DistributionalNationalAccounts:Methodsand Estimates for the United States 1, 23 (2017), http://gabriel‐zucman.eu/files/PSZ2017.pdf (oncurrent trends in income inequality); Emmanuel Saez&Gabriel Zucman,Wealth Inequality in theUnitedStatesSince2013:EvidencefromCapitalizedIncomeTaxData,131Q.J.E.519,552(2016)(oncurrent trends inwealth inequality). Since1980, realpretax incomehasstagnated for thebottom50% of earners, while the top 1% has seen their income triple and their share of total nationalincome nearly double. Piketty et al., supra, at 3. The share of wealth held by the top 10% ofhouseholdshasalsorisensteadilysincethe1980s,toanestimated77.2%in2012,approachingthepreviouspeaklastreachedinthelate1920s.Saez&Zucman,supra,at552.3SeeEdwardD.Kleinbard,CapitalTaxation inanAgeof Inequality52‐54(USCSch.L.Ctr. forL.&Soc. Sci., Leg. Stud. Res. Paper No. 16‐29, Dec. 1, 2016),https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2838532,discussionatSubsectionIV.E.2.4See Ganesh Sitaraman, The Crisis of the Middle Class Constitution: Why Economic InequalityThreatensOurRepublic(2017);BruceAckerman&AnneAlstott,TaxtheWealth:TargettheTopofthePyramidtoProtectAmerica’sDemocracy,Op‐Ed.,L.A.Times,Sept.20,2011,atA11.5A recent study found “systemic and widespread” reductions in the likelihood that children willenjoyahigherstandardoflivingthantheirparentssincethe1940sandthatthetrendisattributableto rising inequality. Raj Chetty et al., The Fading American Dream: Trends in Absolute IncomeMobilitySince1940,356Science398,398‐406(2017).6AsusedinthisArticle,theterm“wealth”referstoastockofnonhumancapital,andincomereferstobothperiodiclaborincome(thereturntohumancapital)andcapitalincome(thereturntowealth).SeediscussionatSectionIII.B.Forproposalsadvocatingforwealthtaxation,seegenerallyGoldburnMaynard,AddressingWealthDisparities:ReimaginingWealthTaxationasaTooltoBuildingWealth,92 Denv. U. L. Rev. 145 (2014); McCaffery, supra; Beverly Moran,Wealth Redistribution and theIncomeTax,53HowardL.J.319,329‐32(2010);ThomasPiketty,CapitalintheTwenty‐FirstCentury515‐18, 524‐30 (Arthur Goldhammer trans., Harvard Univ. Press 2014) (proposals for global andEuropeanwealth taxes);DavidShakow&ReedShuldiner,AComprehensiveWealthTax,53TaxL.Rev. 499 (1999); Deborah Schenk, Saving the Income Taxwith aWealth Tax, 53 Tax L. Rev. 423(2000);DavidJ.Shakow,AWealthTax:TaxingtheEstatesoftheLiving,53B.C.L.Rev.947,948‐50(2016); Bruce Ackerman& Anne Alstott, The Stakeholder Society 94‐112 (1999); Anna Bernasek,Looking Beyond Income, to a Tax on Wealth, N.Y. Times, Feb. 10, 2013 at BU11,


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literature justifying a wealth tax7proceeds as follows: The purpose of theprogressivetaxsystem,whichtaxesindividualsaccordingtotheirabilitytopay,8isto raise revenue in a manner that constrains economic inequality.9 Currentlyprogressive taxation begins and largely ends with the federal income tax.10 Anincome tax, however, is inadequate to the task of redistribution because income

http://www.nytimes.com/2013/02/10/business/yourtaxes/a‐wealth‐tax‐would‐look‐beyond‐income.html.;RonaldMcKinnon,TheConservativeCaseforaWealthTax,WallSt. J., Jan9,2012,atA13.7The focus of this Article is proposals for taxing wealth on distributional grounds as a factor ineconomicwell‐beingand ineconomic inequality. A complementarybutdistinct literature justifiestaxingwealthasanefficientmethodofredistribution.See,e.g.,DavidGamage,TheCaseforTaxing(Allof)LaborIncome,Consumption,CapitalIncome,andWealth,68TaxL.Rev.355,431‐37(2015)(justifyingawealthtaxinlightofthedifferentplanningresponsestotaxesonincomeandwealth);James Banks & Peter Diamond, The Base for Direct Taxation, in Dimensions of Tax Design: theMirrleesReview548,563(J.Mirrlees,S.Adam,T.Besley,R.Blundell,S.Bond,R.Chote,M.Gammie,P.Johnson, G. Myles and J. Poterba, eds, 2010) [hereinafter “Mirrlees Review”] (justifying wealthtaxationonthegroundsthatsavingisasignalofearningability);discussionatSubsectionIV.E.2.8Foradiscussionofdifferentusagesoftheterm“abilitytopay,”seenote58.9Forearly justificationsofprogressivetaxationasaresponsetoeconomic inequality,see,e.g.,R.A.Musgrave&TunThin,IncomeTaxProgression,1929‐48,56J.Pol.Econ.498,510(1948);HenryC.Simons,PersonalIncomeTaxation18‐19(1938);Vickrey,note17,at4(“Progressivetaxationmaybedefinedastaxationthattendstopromoteeconomicequality.).SeealsoBernieSanders,MakingtheWealthy, Wall Street, and Large Corporations Pay their Fair Share,https://berniesanders.com/issues/making‐the‐wealthy‐pay‐fair‐share/ (last visited May 10, 2017)(“At a time of massive wealth and income inequality, we need a progressive tax system in thiscountrythat isbasedontheabilitytopay.”). Progressivitymayalsobejustifiedonothergrounds.Forexample,thebenefitsprinciple,whichassumesacontractualrelationshipbetweengovernmentand taxpayers,would tax individuals in proportion to the benefits they receive from government.Thisviewjustifiesprogressivityif it isassumedthatthebenefitsofgovernmentdisproportionatelyaccruetotherichandincreaseatafasterratethanthebasesubjecttotax. SeeMichaelJ.Graetz&DeborahH.Schenk,FederalIncomeTaxation:PrinciplesandPolicies31(7thed.,2013);EdwinR.A.Seligman,ProgressiveTaxationinTheoryandPractice77,80‐86,122(1894).Progressivityhasalsobeen justified under variations of the equal or fair sacrifice principles, which generally seek topreserveapretaxdistributionofwelfare.SeeDavidKamin,note,WhatIsaProgressiveTaxChange?UnmaskingHidden Values in Distributional Debates, 83 N.Y.U. L. Rev. 241, 272‐74 (2008). Equalsacrifice principles imply progressive taxation if it is assumed thatmoney has decliningmarginalutility,andeachindividualvaluesrelativeamountsofmoneysimilarly.SeeKamin,supra,at274.Awelfarist perspective, in contrast, generally seeks to maximize a weighted function of aggregatesocialutility. Thisviewmayalso justifyprogressive taxationbasedonanassumptionofdecliningmarginal utility of income and on the weight placed on equality of utility in the social welfarefunction.See,e.g.,LouisKaplow,TheTheoryofTaxationandPublicEconomics57‐65(2008).10SeeChrisWilliamSanchirico,DeconstructingtheNewEfficiencyRationale,86CornellL.Rev.1003,1018 (2000) (“The income tax has been and remains the celebrity of redistributionalinstruments...”).Incontrasttotherelativelyprogressivefederaltaxsystem,stateandlocaltaxesaregenerallyproportionalorregressive. SeeDanielJ.Hemel,TheFederalistSafeguardsofProgressiveTaxation93N.Y.U.L.Rev.6*‐11* (forthcoming2018). Theestateandcorporate taxesare smallercomponents of the total federal income tax system and consequently have less impact on overallprogressivity. See Thomas Piketty & Emmanuel Saez, How Progressive is the U.S. Federal TaxSystem?AHistoricalandInternationalPerspective11,App.Fig.1(NBERWorkingPaperNo.12404,July,2006),http://www.nber.org/papers/w12404.


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alone is an incomplete measure of a taxpayer’s economic well‐being,11and inpractice a tax on income alone—at less than confiscatory rates—can only have alimitedeffectinreducinginequality.12Underthisview,accountingforataxpayer’swealth will allow the tax system to more accurately compare taxpayers by theireconomicwell‐beingandtomoreeffectivelyconstrainrisinginequality.

Advocatesofwealthtaxationconsequentlyproposedifferentcombinationsoftaxesonincomeandwealthasfactorsineconomicwell‐being.Theseproposalsforawealth tax generally share a common feature: an assumption that income andwealthmust be taxedunder separate instrumentswith separate rate schedules.13Forexample,DavidShakowandReedShuldiner’s formativeanddetailedproposalwouldtaxwealthasareplacementforthecapitalincometaxlaborincomeunderaseparate income tax.14 Similarly, Bruce Ackerman and Anne Alstott propose aseparate tax onwealth,15in addition to the current tax on both capital and laborincome.16

Theargumentthatwealthshouldbetaxedasafactorineconomicwell‐beingmay be intuitively appealing (or even self‐evident) to some readers but also haslimited normative guidance, as views on fairness and the proper baseline forredistribution will vary.17 Furthermore, measures of economic well‐being andeconomicinequalitywillvarydependinguponthepurposesforwhichthetermsareused.18 To add specificity and substance to the argument that wealth should betaxedasafactor ineconomic inequality, thisArticleconsequentlybegins,notwithsubjective arguments regarding fairness butwith the theorization of how exactlyeconomic inequality isunderstood tocausesocialharm. Inparticular, thisArticlefirstgroundstheargumentfortaxingwealthintherelativeeconomicpowertheoryusedbypoliticalscientiststoexplainhoweconomicinequalitygeneratessocialand

11See,e.g.,Shakow&Shuldiner,note6,at503.12See, e.g., Edward J.McCaffery,TaxingWealth Seriously6‐7 (“The relianceon income taxation tocarrytheweightofredistributionhasbeenadisastrousmistake.”);Ackerman&Alstott,note4(“Weshouldbetaxingthatwealthdirectly,andnotmerelyfocusingonmillion‐dollarincomes.”).Studiesfindthatthefederalincometaxhasonlyaminimaleffectonreducinginequality. SeePikettyetal.,note2,at40‐41,Tbl.II,Fig.I.13Specifically,referencesinthisArticletoproposalswheredifferentbasesaretaxedunderseparateinstrumentsrefertocaseswheretherateatwhichonebaseistaxedisnotaffectedbythesizeoftheotherbase.14SeeShakow&Shuldiner,note6,at540‐46,discussionatSectionIII.D.15Ackerman&Alstott,note6,at94‐11216Theauthorsproposeacoordinatingrulewherebyataxpayerpaysthelesserofthewealthtaxorthe capital income tax for assets subject to both. See id. at 107‐08 and discussion at SubsectionIII.C.3.17See, e.g., the characterization of arguments for any specific normative distributional baseline inWilliamVickrey,Agenda forProgressiveTaxation3‐4 (1947) (“Moreoften thannot, ability topayandtheequivalentterms“faculty”and“capacitytopay”haveservedascatch‐phrases,identifiedbyvariouswritersthroughverballegerdemainwiththeirownpetconcretemeasuretotheexclusionofotherpossiblemeasures.Abilitytopaythusoftenbecomesatautologicalsmokescreenbehindwhichthewriterconcealshisownprejudices”).18See, e.g., Amartya Sen,OnEconomic Inequality 25‐26 (EnlargedEd., 2005) (describing differentmeasuresofinequalityproposedintheliteraturefordifferentpurposes).


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politicalharm,andthenconsiderstheimplicationsofthistheoryfortheprogressivetaxbase.19Asexplored in thediscussion that follows, this theory implies that therelevant measure for comparing taxpayers’ economic well‐being is their relativeeconomicspendingpowerduringthetaxingperiod.

Fromthis startingpointof the relativeeconomicpower theory, thisArticleproceeds to its central argument: Income and wealth should both be taxed asfactors in economic well‐being, but should be taxed through a combined base ofboth factors, and not through separate instruments. This argument is developedthrough two central contributions to the literature. First, this Article identifies afundamental limitationof separate taxeson incomeandwealth. Separate incomeandwealthtaxescannotconsistentlycomparetaxpayersonthebasisoftheirtotaleconomicwell‐beingduring the taxingperiod fromboth factors, andwill favorordisfavor taxpayers depending whether their economic well‐being results fromincome,wealth,oracombinationthereof.Thislimitationresultsfromthenatureofa progressive rate schedulewith increasingmarginal rates,whichwill always taxtwo separate bases at a lower overall rate, when compared to a single tax on acombined measure of both bases. This Article then introduces a new base forprogressive taxation,which is a combined base of both income andwealth. Thisbase measures economic well‐being from both income and wealth in consistentterms, which may then be summed and taxed under a single progressive rateschedule. Furthermore, this base measures economic well‐being in terms ofeconomicspendingpowerduringthetaxingperiod,whichistherelevantmeasureofeconomicinequalityundertherelativeeconomicpowertheory.

This Article’s argument has additional implications for the differencebetween taxing wealth and income, and the limitations of both. First, thisperspectivehighlightshow,contrarytoageneralviewintheliterature,awealthtaxisnot replicablebya taxoncapital incomeearned fromwealth.20Furthermore,awealth tax that accounts for a taxpayer’s entire stock of wealth each perioddisfavorswealthholdersrelativetolaborincomeearners,whereasacapitalincometax favorswealth holders relative to labor income earners.21 Finally,wealth doesnot factor equally in each taxpayer’s economic well‐being, and the economicadvantage from holdingwealthwill varywith the number of future periods overwhichthewealthmustbespread.22Asaresult,proposalsforwealthtaxesimposeagreater burdenon thosewhomust spread theirwealth over a greater number ofperiods.

The basic limitations of the income tax and the rationale for also taxingwealth can be illustrated through the hypothetical treatment of two taxpayers: adoctor and an investor. The doctor earns a good salary but carries debt frommedicalschool,whiletheinvestorhasnodebtandearnsincomefrominvestingher

19SeediscussionatSectionII.B.20SeediscussionatSubsectionIII.C.3.21Seeid.22SeediscussionatSubsectionIII.C.2.


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wealth.Assume,forexample,thedoctorhas$170,000ofdebt23andearnsanannualsalaryof$200,000,24whereastheinvestorhas$35millioninsavingsandalsoearns$200,000byinvestingthesavingsinU.S.Treasurynotes.25

If we consider their economic circumstances during the taxing period, theinvestor is better off than the doctor. Although both earn the same income, theinvestor canalsodrawuponher savedwealth,whereas thedoctormustdevoteaportion of his income to repaying debt. The federal income tax, however, onlycomparestaxpayersbytheirannualincomeandnotbytheirsavedwealthordebt.Consequently, both the investor and the doctor will be treated as having similartaxableincomesandwillpaysimilartaxbills.26

Onesimplesolutionwouldbetotaxtheinvestor’swealthaswell,throughaseparate wealth tax. Separate taxes on income and wealth, however, cannotconsistently compare the economicwell‐being of taxpayerswith varying levels ofincomeandwealth.Thereasonisthataprogressivetaxonincomealonewilltaxtheincome under a rate schedule that will not account for the taxpayer’s additionaleconomic well‐being from wealth, whereas a wealth tax will not account foradditionaleconomicwell‐beingfromincome.

Considerasecondscenarioinvolvingthefollowingthreetaxpayers:

Taxpayer1hassavedwealthbutnowageearnings. Shebeginstheyearwith$1,000,000ofwealthandearns$25,000ofinvestmentincomeduringtheyear.Taxpayer2 isawageearnerwithno savings. Hebegins theyearwith$0ofwealthandearns$100,000oflaborincomeduringtheyear.

23A 2012 study found themedianmedical student graduatedwith $170,000 of educational debt.JamesYoungclaus&JulieA.Fresne,PhysicianEducationDebtandtheCosttoAttendMedicalSchool,2012 Update 3 (Association of American Medical Colleges, Feb. 2013), https://aamc‐orange.global.ssl.fastly.net/production/media/filer_public/8d/aa/8daa5c2d‐838b‐4690‐a353‐170c7f4a7bab/physician_education_debt_and_the_cost_to_attend_medical_school_2012_update.pdf.Thestudyalsofoundthatmoststudentsdonotmakeanypaymentsontheireducationdebtduringtheirresidencybetweenmedicalschoolandpractice.Id.at13‐14.24 See U.S. Bureau of Labor Statistics, Occupational Employment and Wages, May 2016,https://www.bls.gov/oes/current/oes291069.htm#nat (median 2016 physician salary ofapproximately$205,000).25Assuminganannualyieldof0.6%. SeeU.S.DepartmentofTreasury,DailyTreasuryYieldCurveRates, 2016, https://www.treasury.gov/resource‐center/data‐chart‐center/interest‐rates/Pages/TextView.aspx?data=yieldYear&year=2016.26ThedefinitionoftheincomeinSection61oftheCode,whichdoesnotaccountforsavedwealth,andthegeneralrulesfordeductionsfromgrossincomeunder§§161et.seq.,willyieldsimilarnettaxableincomeforbothtaxpayers.Thesubstantivetaxliabilityofeachtaxpayer,whichisafunctionofboththetaxablebaseandtheapplicablerates,maydiffer.Althoughtheinvestorisbetteroffthanthedoctorineconomicterms,theinvestorwouldbetreatedmorefavorablyifherinvestmentreturnis earned not as interest income but as qualifying dividends or long‐term capital gains taxed atpreferential rates under §§ 1(a)‐(d), (h). For an account of the capital gains preference as aconcessiontostructuraldeficienciesintheincometax,seeNoëlB.Cunningham&DeborahH.Schenk,The Case for a Capital Gains Preference, 48 Tax L. Rev. 319, 350‐53 (1993). The example of thedoctor and the investor in this Article illustrates how, even without a capital gains preference, acapitalincomeearnerwouldstillbefavoredrelativetoaworker.


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Taxpayer 3 is awage earnerwith savedwealth. She begins the yearwith$1,000,000ofwealthandearns$25,000of investment incomeand$75,000oflaborincomeduringtheyear.

A progressive income taxwith an increasingmarginal rate schedule treats

Taxpayers 2 and 3 equally, notwithstanding Taxpayer 3’s additional wealth.27 AwealthtaxsimilarlytreatsTaxpayers1and3equally,notwithstandingTaxpayer3’sadditional income. Separate progressive taxes on both income and wealth taxTaxpayer3’s incomeat thesamerateasTaxpayer2’s,andTaxpayer3’swealthatthesamerateasTaxpayer1’s,notwithstandingthefactthatTaxpayer3,withbothincomeandwealth, hasmore economic resources thanTaxpayers1 and2duringthetaxingperiod.Asaresult,aprogressivetaxoneconomicwell‐beingduringthetaxingperiodwouldrequiretaxingTaxpayer3atahigheraverageratethaneitherTaxpayer1or2onbothherincomeandherwealth.

The basic challenge to comparing the three taxpayers is that income andwealthdonotmeasureeconomicwell‐beinginthesameterms.Adistanceinmilesand a distance in kilometers cannot be compared without first translating onemeasure into the terms of the other. Similarly, income and wealth measureeconomic well‐being differently: Periodic income represents a recurring flow ofeconomic resources,28whereas wealth represents a fixed stock, which may beexhaustedonce.Consequently,foranyfixedamount$Xofwealthor$Xofperiodicincome,thelatterisofgreatereconomicvaluetothetaxpayer.

To resolve the limitation of separate income andwealth taxes, this Articleintroducesanewbaseforprogressivetaxation:acombinedbaseofeconomicwell‐being from both income and wealth. The central feature of this combined basetranslates both wealth and capital income into an annuity value (the “wealthannuity”).Thewealthannuity,whichhasbeensuggestedinthewelfareeconomicsliteratureasawaytotranslateastockofwealthintoameasureofperiodicspendingpower,29is calculated in the samemanner as an actual annuity investment. Eachperiod,wealthatthebeginningoftheperiodandcapitalincomeearnedduringtheperiodareused todetermineahypothetical annuitypayment the taxpayerwouldreceive if this wealth was paid back to the taxpayer in equal amounts over the27Thissimplifiedexampleassumesnopreferentialrateoncapital income. Current lawwouldalsotreatTaxpayer2morefavorablythanTaxpayer1if,liketheinvestorinthepriorexample,Taxpayer1’s$25,000ofinvestmentincomequalifiesforthepreferentialratesunder§1(h).Seenote26.28Foradiscussionofnon‐periodicincome,seeSubsectionIV.C.2.29See generally, e.g., Michael K. Taussig, Alternative Measures of the Distribution of EconomicWelfare, Princeton University Industrial Relations Section Working Paper No. 27 (1971),http://dataspace.princeton.edu/jspui/bitstream/88435/dsp01pk02c974k/1/27.pdf; Burton A.Weisbrod&W.LeeHansen,AnIncome‐NetWorthApproachtoMeasuringEconomicWelfare,58Am.Econ.Rev.1315(1968).Incontrasttothepreviousapplicationsofthewealthannuityconceptinthewelfareeconomicsliterature,thisArticleusesthewealthannuityasanelementinanewprogressivetaxbase.Foradiscussionofwhythewealthannuityhasnotbeenmorebroadlyembracedinthetaxliterature andwhy it has heretofore underappreciated relevance for the progressive tax base, seediscussionatSectionIV.A.


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taxpayer’s remaining lifetime.30 In effect, the wealth annuity accounts for ataxpayer’s capital income earned during the taxing period (as under the currentincome tax) and also a portion, but not all, of the taxpayer’s wealth stock. Theportionofthewealthstockincludedinthetaxablebasewillvarywiththenumberofperiods across which the taxpayer expects to spread their wealth, as well as thetaxpayer’sdecisionswhether,andhow,toinvestthiswealth.

Thewealthannuity,whichreflectsbothwealthandcapitalincome,isaddedto a taxpayer’s labor income to yield the combined base of economic well‐beingduringthetaxingperiod.31Thecombinedbasehastwokeyadvantages: First,themeasure consistently accounts for economic well‐being during the taxing periodfromwealth,laborincome,andcapitalincome,andconsistentlycomparestaxpayerswithdifferentlevelsofeach.Asaresult,theseamountsmaybesummedandtaxedunderasingleprogressiverateschedule,therebyavoidingthelimitationofseparatetaxesonincomeandwealth.Second,thecombinedbasereflectseconomicspendingpowerduringthetaxingperiodandtherebytailorstheprogressivetaxbasetotherelevantmeasureofinequalitysuggestedbytherelativeeconomicpowertheory.

ThisArticledoesnotresolveotherdesignconsiderationsrelevanttoanytaxon income,wealth, or a combination thereof. First, this Article does not proposespecificdefinitionalboundaries for theterms“income”and“wealth,”anddoesnotspecify particular assets orminimum levels of either base that should be exemptfrom tax. These exemptions may be set by policymakers on the basis ofadministrativeandotherrelevantconsiderations.32Similarly, thisArticledoesnotprescribe the proper treatment of illiquid, non‐traded, and hard to value assets,whichposeachallengetoanytaxonincomeorwealth.33ThisArticlealsodoesnotsuggesta specific rate schedule tobeapplied toeachcomponentof thecombinedbase. This determination will depend on the different behavioral responses totaxationofdifferentelementsofthebase,theamountofrevenuetoberaised,andthe degree of inequality to be constrained. Finally, this Article does not take apositiononaseparatedebate in the literatureon theconstitutionalityofawealthtax.34

TheremainderofthisArticleproceedsasfollows. PartIIreviewsthemostcommonargumentsfor—andobjectionsto—taxingwealthasafactor ineconomicwell‐beingandintroducestherelativepowertheoryasatheoreticalframeworkforboth formalizing these arguments and responding to the objections. Part III

30SeeexplanationatSectionIV.A.31See Section IV.B. Thismeasure is subject to the same real‐worldmeasurement constraints andnecessaryapproximationsasanincometaxbaseorawealthtaxbase.SeediscussionatSectionIV.C.32SeediscussionatSubsectionIV.C.433SeediscussionatSubsectionsIII.C.1‐2.34Contra,e.g.MirandaPerryFleischer,NotSoFast:TheHiddenDifficultiesofTaxingWealth,NomosWealth Volume *23 (broad reading of direct taxes as covering all “property”); Calvin H. Johnson,ApportionmentofDirectTaxes: TheFoul‐Up in theCoreof theConstitution, 7WM.&MARYBILLRTS.J.,1,4‐5,72(1996)withAckerman&Alstott,note6,at121‐24(doubtingthataSupremeCourtwouldconstrainthefederaltaxingpower).AsequeltothisArticlewilladdressthereal‐worlddesignofawealthtaxinlightofconstitutionalconstraints.


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evaluatesdifferentproposedtaxbasesofincomeandwealthwithinthisframework.Part IV introduces the combined base of economic well‐being from income andwealth, and evaluates its role as an alternative progressive tax base. Part Vconcludes.

II.WhyTaxWealth?A.JustificationsandObjections

A basic consequence of periodically taxing wealth is that a taxpayer paysmore tax if she holds her wealth for a greater number of periods. Advocates oftaxing wealth argue that this treatment is justified because, holding incomeconstant,ataxpayerwithmorewealthduringthetaxingperiodhasagreaterabilitytopaytax.35Criticsofwealthtaxationobjectthatsavingsmerelyrepresentdeferredconsumptionandawealthtaxtherebydisfavorsataxpayerwhospendslaterratherthanearlier.36AsstatedbyProfessorRakowski:

Whatinterestdoesthecommunityhaveinwhetherapersonconsumespost‐tax earnings sooner than later, apart from any profits earned oninvestments?...Thosewhohavebroadcasthisargumentoffernoanswertothiselementaryfairnessobjection,andIcannotwriteaconvincingscriptforthem.37

Supplying thismissing script,which justifies taxing a saver and not a spender, isthereforeanecessaryelementofanyfairnessargumentforwealthtaxation.

One form of the argument for taxing wealth does not directly implicatequestionsofdistributivefairnessbutratherthenatureofrevenuecollection.Underthis argument, the government must collect revenue in the form of money, andconsequently the tax base should compare taxpayers according to their actualcapacitytopayamonetarytax.Anyalternativetaxbase,suchasonethatmeasuressubjectivewell‐being or economic earning potential,38unduly burdens a taxpayerwhocannotfundtheresultingliability.3935See,e.g.,JosephM.DodgeII,TheTaxationofWealthandWealthTransfers:WhereDoWeGoAfterERTA?,34RutgersL.Rev.738,760(1982)(“Wealthrepresentsability‐to‐payforeachtaxableperiodthatthewealthisheld,andintheorythetaxonwealthshouldincreasewiththelengthoftheholdingperiod.”).36See,e.g.,EricRakowski,CanWealthTaxesBeJustified?,53TaxL.Rev.263,366‐372(1999).37Id.at366.38Forexample,ataxonendowment(earningpotential)wouldcompeleverytaxpayertorealizetheirearning potential, a result that Lawrence Zelenak characterized as “talent slavery.” LawrenceZelenak,TaxingEndowment,55DukeL.J.1145,1156‐59(2006).39See,e.g.,JosephM.Dodge,TheFairTax:ThePersonalRealizationIncomeTax,19Fla.TaxRev.522,558 (2016) (“The notion of ability‐to‐pay expresses the idea that taxpayers should contribute togovernment only out of what they can presently contribute to government (namely, cash or itsdeemedequivalent)”);AlanGunn,TheCaseforanIncomeTax,46U.Chi.L.Rev.370,379(1979)(“A


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Thisbasicconstraintsuggestsaliteraldimensiontotheterm“abilitytopay”:Thetaxbasemustreflectameasureofactualabilitytopay.40Forexample,undertheincometaxbase,thetaxpayerispresumedtohavefundsavailablefromwhichtopay the tax, to the extent income reflects actual funds available to the taxpayer.41Forthesamereason,ataxpayerwithgreaterwealthhasgreateractualcapacitytopaytax,whereasaspenderwhoexhaustedtheirwealthinpriorperiodsdoesnot.

Thisargumentdoesnot,however,provideapositivenormativeargumentforwhy the tax system should distinguish between savers and spenders, beyond thepracticalneedtoraiserevenuefromthosewhohavethefundstopay.Asecondlineof argument in the wealth tax literature therefore points to the additional andimmediate advantages of holdingwealth, beyond themere ability to spend in thefuture.Forexample,wealthtaxationhasbeenjustifiedonthebasisoftheeconomicsecurity, social and political influence,42and economic opportunities43thatwealthconfers.

Thissecondlineofargumenthasbeencharacterizedbyobjectorstowealthtaxationassuggestingthatwealthshouldbetaxedonthebasisofthesubjectiveorimputed benefits of holding wealth.44 Characterized thus, the argument may becritiquedonthegroundsthatthereisnoreasontotaxthebenefitsofsavingmoreheavily than the benefits of spending45—or any other imputed benefits, for thatmatter.Forexample,ifanindividualchoosestospendhiswealthearlierinsteadofsaving,thepersonalbenefitsofspendingearlierpresumablyoutweighthebenefitsderivedfromholdinghiswealthlonger,andtherestillwouldbenojustificationtotreatthesaverdifferentlyfromthespender.46B.RelativeEconomicPowerTheory

Therelativeeconomicpowertheory—usedbypoliticalscientiststoexplainhoweconomicinequalitygeneratesharmfulsocialhierarchiesanddistortspoliticaloutcomes—suggestsadifferentcharacterizationofthe“imputedbenefitsofwealth”

taxthatrequiredsomeonetopaymoremoneythanhehadorcouldeasilygetwouldbeunacceptablyharsh...”);StephenB.Land,DefeatingDeferral:AProposalforRetrospectiveTaxation,52TaxL.Rev45,55(1996).40This literal connotationof “ability topay” is also implied inother related terms fordefining theprogressivetaxbase,suchastheterm“contributivecapacity”usedinPiketty,note6,at525andtheterm“capacitytocontribute”usedinSchenk,note6,at459.41That is, the taxpayer may presumably fund the tax liability by setting aside a portion of theirincome and generally plan their budget to account for tax liabilities. See Deborah H. Schenk, APositiveAccountoftheRealizationRule,57TaxL.Rev.355,360‐65(2004).42See,e.g.,JamesR.Repetti,Democracy,TaxesandWealth,76N.Y.U.L.Rev.825(2002);Schenk,note6,at463‐70.43SeeAckerman&Alstott,note6,at96‐100(describing theunequalopportunitiesaffordedto thebeneficiariesofwealth).44See,e.g.,thecharacterizationinRakowski,note36,at366‐67.45Seeid.at367‐70.46Seeid.at368.


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argument that is not susceptible to the critique described above. In effect, thistheory supplies a script to justify taxing savers differently from spenders, andsuggestsaspecificwaytomeasureincomeandwealthasfactorsineconomicwell‐being.

Ingeneralterms,therelativeeconomicpowertheoryholdsthatexcessivelyunequal distributions of economic resources and market power can result inunequaldivisionsofpoliticalandsocialpoweraswell. Thisprocessoccurswhenthewealthyassertsocialcontrolandprioritizetheirownpreferencesthroughtheirability to exert their market power.47 Those with fewer economic resources arediscouraged from competingwith thewealthy or from even attempting to assertpreferences theycannothope to realize.Political scientistsuse the relativepowertheory to explain political outcomes that do not reflect voter preferences,48butmorebroadlythetheoryexplainshoweconomicdifferencesproduceharmfulsocialhierarchy.Thefollowingpassageillustrateshowtherelativeeconomicpowereffectoperatesbeyondthepoliticalarena:

Wheninequalityisgreater,poorerindividualsaremoreofteninpositionsofsubservience. At work, the greater threat posed by unemployment meansthattheymustincreasinglysubmittothedemandsoftheiremployers.Inthemarketplace,theymustacceptthattheyhavenoaccesstogoodsandservicesthat others enjoyor risk incarceration. For richer individuals, on theotherhand, greater inequality means that it is easier to find someone who willpromptly and unquestioningly fill their orders—whether to deliver a newluxuryautomobileor tend to their lawnsandgardens. Forboth richer andpoorerindividuals,greatereconomicinequalitymakesmarketrelationswithothersmuchmorelikelytobecharacterizedbyobedienceanddeference.49Therelativeeconomicpowertheorysuggestsadifferentcharacterizationof

the argument that wealth should be taxed because of its imputed benefits.Economic power doesn’tmerely generate subjectivewell‐being to the holder, butalso specific and objective social harms resulting from excessive imbalances ofeconomic power at any point in time. From this perspective, the saver is in factbetteroffthanthespender,andthejustificationfortaxingthesaverdependsnotonthe saver’s own subjective well‐being but on the deleterious effect of those witheconomicpoweronothermembersofsociety.

The relative economic power theory has specific implications for thedefinition of economicwell‐being and its comparison across taxpayers. First, thecritical factor under the relative power theory is theability of thewealthy to usetheirmarketpower,whichissufficienttoasserttheirpreferencesoverthosewith

47SeeFrederickSolt,EconomicInequalityandDemocraticPoliticalEngagement,52Am.J.Pol.Sci.48,49(2008).48Seeid.49Frederick Solt, The Social Origins of Authoritarianism, 65 Political ResearchQuarterly 703, 704(2012).


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less market power.50 As a result, those with greater economic power need notspend their economic resources in order to achieve their preferences; a credibleabilitytodosoissufficient.Therelativeeconomicpowertheorythereforesuggeststhateconomicwell‐beingshouldbemeasuredbyreferencetoataxpayer’seconomicspendingpower.

Non‐marketresourcesorother factors inwell‐beingdonot factorsimilarlyinto this process because they do not reflect additional spending power. Forexample, the person who grows vegetables for their own personal consumptiondoesnothavethesameeconomicpowerassomeonewhoearns$100 incashandcanchoosewhether touse themoney tobuyeithervegetablesorpoliticians. Forthe same reason, the relative economicpower theorydoesnot suggest equalizingutility or sacrifice across taxpayers,51but rather reducing economic inequality inabsoluteterms.

Because the relative economic power relationship depends upon themereabilitytospend,apersonwhopreservestheirwealth(andtheireconomicpower)across multiple periods benefits from this process for more periods than does aperson who spends their wealth earlier. The relative power theory thereforesuggeststhateconomicwell‐beingshouldbemeasuredperiodically,ratherthanonalifetimebasis,andexcessiveimbalancesbetweentaxpayersshouldbeconstrainedatanypointintime.

The relative economic power theory also implies a more nuancedunderstandingofthedistinctionbetweensaversandspenders.Asdescribedabove,the primary objection to a tax on either wealth or capital income is that theseinstrumentsunfairlydistinguishbetweentaxpayersdependingonwhentheychooseto spend their resources.52 This objection suggests that a tax system should beneutralastothetimingofspendingandshouldnotsanctionawealthtaxthattaxesa saver each period on their savings, while favoring a spender who chooses toconsume their wealth earlier. The relative economic power theory, however,suggestsadistinctionbetweenspendinginpreviousperiodsandspendinginfutureperiods.Aspenderwhousestheireconomicresourcesinpreviousperiodshaslesseconomic spendingpowerduring a subsequent taxingperiod thana saver. Fromthe perspective of the relative power theory, a saverwho preserved theirwealthfrompriorperiodsisinfactbetteroffthanaspenderwhodidnot.

Under the relative economic power theory, however, economic resourcesonly reflect greater economic power to the extent that they are in fact crediblyexpendable in thecurrentperiod. Apensioneror saverwithwealth thatmustbe

50SeeRobertGoodin&JohnDryzek,RationalParticipation:ThePoliticsofRelativePower,10Brit.J.Pol. Sci. 273, 276‐78 (1980) (arguing that citizens with less economic power therefore behaverationallywhentheydonotchallengethepreferencesofthosewithgreaterpower).51Themeasuresof equality that form thebasis forother justifications forprogressive taxation, asdiscussed in note 9. That is, the relative economic power theory does not specifically reflect awelfarist perspective which would maximize a weighted function of aggregate social utility. Asdescribed innotes 198‐199 and accompanying text, however, the relative economicpower theoryanditsimplicationsforthetaxbasemaybeincorporatedwithinawelfaristanalysis.52Seenote37andaccompanyingtext.


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preservedforuse in the futurecannotcredibly threatentospend it in thecurrentperiodandthereforecannotclaimrelativeeconomicpower.Asaresult,therelativepower theory implies accounting each period for prospective spending needs bysavers, as a liability to be applied against current wealth, but not retrospectivedecisionswhetherataxpayersavedorconsumedinpriorperiods.

Therelativeeconomicpowertheoryalsoimpliesreducingunequaleconomicoutcomes resulting from market activities and not just unequal opportunities toparticipateinthemarket.Advocatesoftaxingwealthtoequalizeopportunityargue,in contrast, that economic inequality may be justified as long as the inequalityoriginates from personal choices and effort, not from unequal starting position.53Equalizing opportunity but preserving inequality of outcomes, however, will notaddressthesocialharmsresultingfromdifferencesinrelativeeconomicpower.Forexample, if the inordinatewealthofbothDonaldTrump, Jr. andMarkZuckerbergafforded themasymmetric social andpolitical power, itwouldnotmatter if one’swealth was due to a happenstance of birth and the other’s to what some mayconsidersociallyproductiveentrepreneurship.

III.TaxingIncomeandWealth

ThisPartevaluatesoptionsforthetaxationofincomeandwealth,orboth,asfactors in economic well‐being during the taxing period. Sections III.A and III.Bbeginwithtwopreliminarydiscussions.SectionIII.Aprovidesadetailedanalysisofthe functions of the tax base under a progressive rate schedule, and Section III.Breviews basic principles and ambiguities in defining the terms “income” and“wealth.” Section III.C evaluates the choicebetween taxing incomeorwealth anddemonstratesthelimitationsofeitherinstrumentasataxoneconomicwell‐being.Section III.C also evaluates the taxation of capital income as an indirect tax onwealth. Finally, Section III.D considers proposals and options for the taxation ofboth income andwealth, through either separate instruments or a single base ofincomepluswealth.

Thekey insight in theanalysis that follows is that incomeandwealtheachmaybeavailableasabasefortaxation.If,however,taxpayersshouldbecomparedby an underlyingmeasure of economic spending power during the taxing period,thenneither incomenorwealth fully reflects thismeasure.54 Furthermore, taxing

53A liberal egalitarian view, for example, would allow for redistribution to correct for unequalstarting positions but would generally not interfere with inequality resulting from subsequentchoices.See,e.g.,Ackerman&Alstott,note6,at24‐25.54Professor Daniel Shaviro similarly compares signals of well‐being to turtles in the proverbialtower, wherein a “bottom turtle” reflecting an underlying measure of well‐being is difficult toascertain, even if itmust exist, andwhich is the desirable basis for comparing taxpayers. DanielShaviro, Endowment and Inequality, in Tax Justice: The Ongoing Debate 123, 124 (Joseph J.Thorndike&DennisJ.VentryJr.,eds.2002)(referencingthestoryof“thewomanwhoclaimedthattheearthrestsonthebackofaturtleand,whenaskedwhattheturtlerestson,respondedthatitwas‘turtlesallthewaydown’”).


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both income andwealth separately does not yield the same result as taxing bothfactors under a single progressive rate schedule, because a progressive rateschedule with increasing marginal rates will always tax two separate bases at aloweroverallrate,whencomparedtoasingle taxonacombinedmeasureofbothbases.

Theanalysisthatfollowsalsohighlightsdifferentaspectsofthechallengesintaxing economic spending power by taxing income and wealth. In particular,reconciling incomeandwealthas factors ineconomicspendingpower faces threekey considerations: (1) either wealth or human capital may or may not beproductively employed to generate market earnings, with consequent effects oneconomic spending power; (2) labor and capital incomemeasure economicwell‐being indifferenttermsbecause laborreflectsthereturnoftheentireprincipalofhuman capital while capital income generally reflects an investment return inadditiontothestockofwealth;and(3)wealthandincomealsomeasureeconomicspendingpowerindifferenttermsas,respectively,astockandaflow.A.TwoFunctionsoftheProgressiveTaxBase

In a progressive tax system, the average rate of tax increases with the

amountof the taxablebase. Agraduated rate schedule, forexample, taxeshigheramountsofthetaxablebaseathighermarginalrates,55whichhastheeffectoftaxingthe entire base at higher average rates as the size of the base increases.56 Forexample,assumeaprogressiveincometaxwithagraduatedrateschedule,inwhichthefirst$100,000ofincomeistaxedata20%rateandadditionalincomeistaxedata40%rate. AssumethatTaxpayerAhas$100,000of incomeandTaxpayerBhas$200,000ofincome.TaxpayerAwillpayatotaltaxof$20,000,fora20%averagerate,whereasTaxpayerBwillpayatotaltaxof$60,000,57fora30%averagerate.

Ineffect,thebaseinaprogressivetaxservestwodistinctfunctions.First,thebase serves as ameasure for comparing taxpayers—generally referred to as eachtaxpayer’srelative “ability topay”58—and therebydetermines theapplicablerates

55Forexample,seethegraduatedratesofincometaxationinIRC§1(a)‐(d).56Agraduatedratescheduleisnottheonlywaytoachieveprogressivity.See,e.g.,JosephBankman&ThomasGriffith,SocialWelfareandtheRateStructure:ANewLookatProgressiveTaxation,75Cal.L.Rev.1905,1905‐16(1987)(describingtheprogressiveeffectofaflattaxplusacashgrant).5720%of$100,000plus40%of$100,000.58Under this meaning of the term, “the” has no normative significance but merely serves as ashorthandfortheuser’snormativebasisforcomparingtaxpayers.Cf.Vickrey,note17,at374(“Moreoftenthannot,abilitytopayturnsouttomeanjustaboutwhattheuserwantsittomean”);Schenk,note6,at469n.173(“Thisphraseisintendedasamerenotationfortheideathattaxpayersshouldnot bear the revenue burden equally; that is, some taxpayers are able to, and therefore should,shouldera largertaxburdenthanothers.). Forotherusesof thetermwithsubstantivenormativeimplications, see, e.g., Joel Slemrod, Introduction, in Tax Progressivity and Income Inequality 1, 2(Joel B. Slemrod, ed., 1996) (using “ability to pay” in reference to a normative principle of equalsacrifice).


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at which each should be taxed. For purposes of this discussion, this function isreferredtointhisArticleasthe“comparing”functionofthebase.Second,thebaseserves as a variable that determines the tax liability due when taxed under theprogressiverateschedule.Forpurposesofthisdiscussionthisfunctionisreferredto in this Article as the “calculating” function of the base. In other words, thecomparingfunctionofthebasefirstdeterminestheapplicabletaxrate,andthenthecalculating functiondetermines the tax liabilitydue,whenthebase is taxedat theapplicablerate(s)undertheprogressiveschedule.

Inthesimplecase,asingleattributeofthetaxpayerisgenerallysufficienttoserve both the comparing and calculating functions.59 For example, under thefederal income tax, the relevant attribute is taxable income, and this generallydeterminesboth theapplicable tax rate and the tax liabilitydue.60Abase for thecalculating function, however, may not be a sufficient base for the comparingfunction.61Forexample, if ability topay isa functionofbotha taxpayer’s incomeandwealth,thenneitherbaseisindependentlysufficienttomeasureabilitytopay,andthereforetoserveinthecomparingfunction.62

Income andwealth also cannot be taxed separately as factors in ability topay.This isbecauseseparately taxingdifferentattributesofability topayunderagraduatedratescheduledoesnotyieldthesametaxliabilityasasingleprogressivetaxonanaggregatemeasureofbothattributes.Toillustratethispoint,assumethattwohypotheticalattributes,A1andA2,both factorequally intoability topay63andmeasureability inunits insteadofdollars. Assume first thateachofattributesA1andA2aretaxedunderseparateinstruments,andeachinstrumenthasagraduatedrateschedulewhichtaxesthefirst100,000unitsofabilityat$0.20perunitandanyadditionalunitsat$0.40perunit.AssumenowthatTaxpayerAhas100,000unitsofability,allfromA1,andTaxpayerBhas200,000unitsofability:100,000fromA1and100,000 from A2. As in the example above, Taxpayer A will pay a total tax of$20,000,foranaveragerateof$0.20perunit.IfattributesA1andA2aretaxedunderseparateinstruments,however,TaxpayerBwillpayatotaltaxof$40,000($20,00059This case can be expressed as , where A is the attribute of the taxpayer, C1 is thecomparingfunctionofthebase,andC2isthecalculatingfunction.60First, income serves the comparing function, as the applicable tax rates are determined under§1(a)‐(d) by reference to the taxpayer’s taxable income. Income then serves in the calculatingfunction,astheresultingtaxliabilityisdeterminedbytaxingthisincomeattheresultingrates.Thisexample is illustrative, andof course, additional factors suchas charactermayalsoaffect the finalapplicableratesundertheincometax.Forexample,theapplicableratestructurefordividendsandlong‐termcapitalgainsisdeterminedseparatelyunder§1(h).61Thatis,althoughprogressivetaxinstrumentsgenerallyadoptabaseofasingleattribute,suchasincome in thecaseof the incometax, there isnoreasonwhyan instrumentcouldnot taxmultipleattributes under a single base, if it were socially desirable to compare taxpayers by reference tomultipleattributes.See,e.g.,ChrisWilliamSanchirico,DeconstructingtheNewEfficiencyRationale,86CornellL.Rev.1003,1021,1027‐29(2000). ThecasewhereinmultipleattributesarefactorsinthecomparingfunctionofthebasecanbeexpressedasC1 ƒ A1,A2,... ,wheretheseriesA1,A2,...referstoallattributesofthetaxpayerthatarerelevantinmeasuringabilitytopay.62ThecasewhereinbothwealthandincomearefactorsinthecomparingfunctionofthebasecanbeexpressedasC1 ƒ I,W ,whereIisincomeandWiswealth.63Thatis,XunitsofeitherA1orA2reflectthesamelevelofabilitytopay.


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undereachinstrument),forthesameaveragerateof$0.20perunit.TaxpayerBhasgreaterabilitytopaybutstillpaystaxatthesamerateasTaxpayerA.

This example illustrates the practical consequences of the distinctionbetweenthecomparingandthecalculating functionsof the taxbase. In thiscase,each of attributes A1 and A2serves the calculating function, as the base of theirrespective instruments, but neither is a sufficient measure of ability to pay forpurposesofthecomparingfunction.Asaresult,TaxpayerBisnottaxedatahigherrate thanTaxpayerA,despiteTaxpayerB’sgreaterability topay. The case is thesameforTaxpayers1,2,and3describedabove,64whereTaxpayer3hasthesamewealthasTaxpayer1andthesameincomeasTaxpayer2,andthereforehasgreatereconomic well‐being than either. Under separate income and wealth taxes,however, Taxpayer 3 would not be taxed at higher rates on her income and herwealth,becauseneither incomenorwealth isacompletebase forpurposesof thecomparingfunction.

BecauseeachofA1andA2intheexampleaboveisaseparatefactorinabilitytopay,acombinedmeasureofbothattributesisneededtoperformthecomparingfunctionofthebase.Thiscombinedbasemaybesubsequentlytaxedunderasingleprogressiverateschedule.65Inthiscase,sinceA1andA2measureequivalentunitsofabilitytopay,thetwoattributesmaybesummedtoyieldanaggregatemeasureofability.66Considertheresultifthisaggregatemeasure,definedasthesumofbothA1andA2, is taxedundera singleprogressive rate schedule. TaxpayerAwill stillbetreatedashaving100,000unitsofabilityandpayataxof$20,000,whileTaxpayerBwillbetreatedashaving200,000unitsofability(100,000fromeachofA1andA2)andwillpayatotaltaxof$60,000,67oranaveragerateof$0.30perunit.68Inthiscase,TaxpayerBisappropriatelytaxedatahigheraveragerate,onaccountoftheirgreaterabilitytopay.

Thedistinctionbetween the comparingandcalculating functionsof the taxbase—andtheconsequencesofthisdistinctionforresultingtaxliabilities—maybeillustratedthroughanexamplefamiliartothestudentofanintroductorycourseinfederalincometaxation:thetaxationofmarriedcouples.Theincomeofeachspousemaybeavailabletoserveinthecalculatingfunctionofthebase,tobetaxedunderaspecifiedrateschedule.If,however,marriedtaxpayersshouldbecomparedonthebasisoftheirtotalhouseholdincome,thentheincomeofeachspouseisinsufficientforthecomparingfunctionofthebase.Furthermore,theseparatetaxationofboth

64SeePartI.65Alternatively, separate instruments may be used, if each instrument is cross‐dependent andadjuststheratescheduletoaccountfortheamountofthetaxablebaseundertheotherinstrument.Forpurposesofthediscussionthatfollows,referencestoseparateinstrumentsrefertoinstrumentsthatarenotcross‐dependent,andreferencestoasingleinstrumentreferstoeithercross‐dependentinstrumentsoraninstrumentwithasingletaxbase.66Asdescribedinnote61,C1 ƒ A1,A2 .IfabilitytopayisdefinedasthesumofA1andA2,thenC1 ƒ A1,A2 A1 A2.67 $0.20x100,000 $0.40x100,000 .68Stated differently, if T x is the progressive marginal rate schedule applied to the tax base x,yieldingthetaxliabilitydue,thentheseexamplesillustratethat .


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spousesunderthespecifiedratescheduleyieldsalowertotaltaxliabilitythanthetaxationoftheircombinedhouseholdincomeunderthesamerateschedule.

For example, in 2017 the ordinary taxable income69of amarried couple istaxedatmarginal ratesofup to39.6%oncombined incomeabove$470,700.70 Ifeachspousehas$250,000ofnettaxableincomeandistaxedindividuallyunderthesame rate schedule, eachwouldpay $57,717, for a total household tax liability of$115,434.Thehighestrateappliedtoaportionofeachspouse’sincomeis33%.Ifthecombinedhousehold incomeof$500,000 is taxedundertherateschedule, thetotaltaxliabilitywouldbe$143,230.80,andthehighestrateappliedtoaportionofthe household income is 39.6%. This consequence of the difference between thecalculating and comparing functions of the base will arise in any case whereprogressivity is implemented throughamarginalrateschedule,andall suchcasesfollowageneralrule:Separatetaxesondifferentfactorsinthecomparingfunctionofthebase,underwhicheachfactorservesasthecalculatingfunctionofadifferenttax instrument, will yield a lesser tax liability than a single progressive tax on acombinedbaseofthesamefactors.B.TheDefinition(s)of“Income”and“Wealth”

Asmanyscholarshavenoted,therearenoobjectiveandgenerallyapplicabledefinitionsof theterms“income”or“wealth,”71in thesamemannerthat therearedifferent ways to define and measure economic inequality and economic well‐being.72Forexample,“income”mayrefertoanarrowmeasureofnetreceiptsfrommarkettransactionsorabroadermeasurethatincludesimputedincome—benefitsthat accrue without the mediation of market transactions, such as from self‐providedservicesandfromtheuseofpersonalproperty.73Similarly,“wealth”mayrefer to assets with marketable value or a broader measure of all sources ofobjectiveandsubjectivevalue.74

Ineachcase,thenormativecontextinwhichthetermsareusedwillinformeach term’s definition.75 For example, if the metric for measuring income is theeffectonthehouseholdbudget, thetermshould includeboth imputedandmarketincome,because itshouldnotmakeadifference ifapersonearns$100with theirlabor and spends it on vegetables, or if they instead earn imputed income by69Taxable income is thenet amountof income subject to tax under the rate schedules in §1 afteraccountingfor“abovetheline”deductionsunder§62(a),personalexemptionsunder§151,andtheitemizedorstandarddeductionsunder§§63(a)‐(b).70Section1(a);RevProc.2016‐55,at7(inflationadjustedbracketsfor2017).71See,e.g.,JohnR.Brooks,TheDefinitionsofIncome,71TaxL.Rev.___,7*‐22*(forthcoming2017)(describingthelong‐runningandunsuccessfulattempttoarticulateanobjectivedefinitionofincomebytaxtheorists);VictorThuronyi,TheConceptofIncome,46TaxL.Rev.45,45(1990).72Seenote18andaccompanyingtext.73SeeBrooks,note71,at8*‐11*.74SeeShakow&Shuldiner,note6,at526‐29(consideringthescopeofassetssubjecttoawealthtax).75See,e.g.,Brooks,note71,at3*(“Ultimately,‘income’iswhateversocietywantsittobeinordertoachievearesultthatthedemocracybelievestobeappropriateandjust.”).


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laboringintheirgardenandgrowingthevegetablesontheirown.76If,incontrast,themetricformeasuringincomeisaccretionstomarketpower,thenearning$100incashwouldqualifywhilegrowing$100worthofvegetablesforpersonalusemaynot.77

As described above, the relative economic power theory suggests thattaxpayers should be comparedby their relative economic spendingpowerduringthe taxing period. From this perspective, the scope of the income and wealthdefinitions should reflect measures of economic power or sources of value thatreflecttheabilityofholderstoasserttheirdominancethroughmarkettransactions.Thediscussionthatfollowsconsequentlyreviewstherolesofincomeandwealthasmeasuresofeconomicspendingpowerduringthetaxingperiod.1.Income

In the most general terms, “income” connotes flow of new economicresources during a specified period,78which may be either spent or saved.79Preexistingwealth isexcluded from the incomedefinition, in thesamemannerascash pulled out of one’s wallet. As described above, the scope of the incomedefinitionwilldependupon thenormativecontext inwhich thedefinition isused.Fromtheperspectiveoftherelativeeconomicpowertheory,theincomedefinitionwill depend upon the types of flows that are considered to reflect additionaleconomicspendingpower.Theeasiestcasestodistinguishareaccretionsofliquidmarket resources, such as cash and cash‐like payments, on the one hand, andaccretions thatoccurentirelyoutsideof themarketsuchas imputedorsubjectivebenefits,ontheother.

Inbetweenthesetwopoleslieinevitabledefinitionalambiguities,suchastheincreaseinvalueofassetsthatdonotreadilytradeinthemarketorthatataxpayerchoosesnottomonetize.Underthecurrentfederalincometax,thegeneralsolutionfortaxingincomefromsuchassetsistherealizationrule,whichdeferstaxuntilanasset is sold, even if the appreciation occurred in prior periods.80 This rationale,however,doesnotjustifythecurrentbroadapplicationoftherealizationruletotheappreciation of traded assets and financial instruments. Appreciation of theseassets confers immediate economic value, which could be taxed as income eachperiodonamark‐to‐marketbasis.81

76SeeThuronyi,note71,at80‐82.77Seeid.at82.78Income,ShorterOxfordEnglishDictionary1354(6thed.,2007).79Cf.theHaig‐Simonsincomedefinition,asthesumofconsumptionandnetsavings(accumulations)duringthetaxingperiod.HenryC.Simons,PersonalIncomeTaxation:TheDefinitionofIncomeasaProblemofFiscalPolicy50(1938).Scholarshavesuggestedthatthisdefinitionissimilarly“elusiveandambiguous”andwilldependontherelevantdefinitionsof“consumption”and“accumulations”undertheuser’snormativeviewoftaxequity.SeeThuronyi,note71,at46‐47,54.80IRS§1001.81SeeAriGlogower,TaxingCapitalAppreciation,70TaxL.Rev.111,116‐21(2016).


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Incomemay result from themonetization of human capital, in the form oflabor income, or the productive investment of nonhuman capital (wealth), in theform of capital income. Capital income and labor income, however, measureeconomicspendingpowerinfundamentallydifferentterms.82Atruecapitalincomeflow does not reflect a return of the wealth principal but rather an accretion inexcess of the starting principal.83 Consequently, an investor who earns capitalincomecouldspendtheincomeeachperiod,whilepreservingthewealthprincipal.In the case of labor income, however, the labor income earned reflects the entirereturnofhumancapital,withnoneremainingoncethetaxpayerstopsworking. Ineffect,laborincomemaybeunderstoodasataxpayercashingoutaportionoftheirbalance of human capital each period.84 The easiest way to illustrate thefundamental difference between the measures of capital and labor income is toconsidertheresultstotwoindividuals,onewhoearnscapitalincomeandonewhoearns labor income, andwhoboth spendall the incomeearnedeachperiod. Theindividual earning capital income will still have their principal of wealth intact,whiletheindividualearninglaborincomewillhavenothingleft.2.Wealth

Whereas “income” reflectsaneconomic flowduring the taxingperiod fromboth human and nonhuman capital, “wealth” generally refers to a stock ofnonhumancapital.85 Ineffect, “wealth” reflectsaccretions frompriorperiods thatweresavedratherthanspentinthoseperiods.Thedifferencebetweenwealthasastockandincomeasaflowmaythusbedistinguishedonthebasisoftheirtreatmentofconsumption: Theincomedefinitionnotdistinguishbetweentheportionoftheflow that is consumed and the portion that is saved for the future, whereas thewealthdefinitionnecessarilymakesthisdistinctionandonlymeasuresthelatterinsubsequentperiods.

Likeincome,thescopeofthewealthdefinitionwillnecessarilydependuponthe normative context in which the term is used. From the perspective of therelative power theory, the wealth definition will also depend upon the forms ofwealth that are considered to reflect additional economic spending power. The

82SeeLouisKaplow,HumanCapitalUnderanIdealIncomeTax,80Va.L.Rev.1477,1497(1994).83“CapitalIncome”mayresultfromtherisk‐freereturntodeferredconsumption,compensationforbearing risk, supernormal returns such as those resulting from luck and monopolies, mislabeledlaborincomeandinflation.SeeJoelSlemrod&JonBakija,TaxingOurselves302‐306(5thed.2017).84SeeKaplow,note82,at1482‐84,1497(demonstratingthatthereturntohumancapitaleachyearintheformoflaborincomeconstitutestheconversionofpreexistingcapitalintoacurrentflowinthesamemanneraswithdrawalsofcashfromabankaccount);id.at1490(“Onemightsay.. .thattheconventionalincometaxignoresthe"capital"in"humancapital.")85See, e.g. the terminology in James B. Davies, Wealth and Economic Inequality, in The OxfordHandbookofEconomicInequality127(BrianNolan,WiemerSalverda&TimothyM.Smeeding,eds.,2011).


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easiest candidates for inclusion in thewealth definition are cash, cash‐like assets,andmarketablesecurities. As in thecaseof the incomedefinition,assets thatarenontradedorwithmarketvaluethatataxpayerchoosesnottomonetizeposemoredifficultcases.Forsuchcases,itispossibletostructureawealthtaxwithasimilarsolutionastherealizationruleundertheincometaxbydeferringtaxuntilthetimethatanontradedasset’svalueismonetizedthroughasale.

Wealthmeasureseconomicwell‐beinginfundamentallydifferenttermsthanboth labor and capital income. In contrast to income,which represents a flowoffundsoveraperiod,wealth isstrictlynon‐periodicandrepresentsa fixedstockofeconomic resources, which can only be exhausted once. Furthermore, whereaslabor income reflects a return of a portion of the taxpayer’s principal of humancapital,wealth reflects the entireprincipal of a taxpayer’snonhumancapital. Forthesimplest illustrationof thisdifference, contrastaworker,whoearns$100,000eachyear,andaretiredsaver,whodoesnotworkandhas$100,000incashandnoincome. Theworker has greater economic spending power in the taxing period,because the worker’s labor income reflects only a portion of their total humancapital,whilethesaver’swealthreflectstheirentirestockofnonhumancapital.C.TaxingIncomeorWealth1.TaxingIncome

An income tax basemeasuresmarket income each period fromboth laborandcapital.86Thisamountwillvarywithataxpayer’shumancapitalandwealth,aswell as the taxpayer’s decision whether and how to monetize and productivelyinvestboth.Asdescribedingreaterdetailbelow,bothcapitalandlaborincomewillfluctuate from year to year and to this extent will not reflect a recurring flowthroughout the taxpayer’s lifetime.87 Even a perfectly recurring income flow,however, is still an incompletemeasureofa taxpayer’seconomic spendingpowerduring the taxing period because income alone does not account for a taxpayer’swealth(whichreflectsadditionaleconomicresources)ordebt(whichwillpartiallyor fully absorb the income flow). As a result, income alone is insufficient for thecomparingfunctionoftheprogressivetaxbaseundertherelativeeconomicpowerframework.

For example, consider the doctor and the investor described above,88whoboth earn $200,000 of income during the year. Even a hypothetically preciseincome tax that accurately measured both capital and labor income would notaccountforthefactthattheinvestorhasanadditional$35millionofsavedwealth.Conversely,thedoctorwhoearnsthesame$200,000mustdedicateaportionofhisincome to servicing their $170,000debt. For amore specific illustration, assume

86See,e.g.,IRC§61(incomebaseforpurposesofthefederalincometax).87SeediscussionatSubsectionIV.C.2.88Seenotes23‐25andaccompanyingtext.


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thatthedoctor’sdebtaccruesinterestatarateof5.25%89andispayableovera40‐yearperiod,generatinganinterest liabilityofapproximately$8,925inthecurrentperiod.90Thedoctorwillmakeannualdebtpayments(ofprincipalandinterest)ofapproximately $10,000 per year,91leaving only $190,000 available from his$200,000 income. In contrast, the investorhasnodebt obligations to absorbher$200,000 incomeandhasadditionalavailableeconomicspendingpower fromhersavedwealth.

Asdescribedabove,thedifferencebetweentheincomesoftheinvestorandthedoctormayalsobeunderstoodintermsofthedifferencebetweenlaborincomeand capital income.92 The investor’s $200,000 of capital income reflects only aninvestmentreturnbutdoesnotaccountforher$35millionwealthprincipalthatshepreserves.Thedoctor’s$200,000oflaborincome,incontrast,reflectsareturnofaportionofhisprincipalofhumancapital.Theeasiestwaytoillustratetheirdifferenteconomiccircumstancesistoconsidertheresultiftheinvestorandthedoctoreachconsumetheir$200,000ofearningseachyear.Attheendoftheinvestor’slife,sheis leftwiththeir$35millionstockofwealth—alargestoreofremainingeconomicresources.Thedoctor,incontrast,hasnothingleft,becauseallofhishumancapitalhasbeenfullyexhaustedandtaxedaslaborincome.

In a similar manner, an income tax does also not account for reducedeconomic spending power as a result of negative wealth, or debt. Contrast thetreatmentofthedoctorwiththetreatmentofahypotheticaldentistwhoisfortunateenoughtograduatewithnodebt(butwhohasnopositivewealth)andwhohasthesame$200,000salaryasthedoctor.Becausetheincometaxbaseignoresnegativeas well as positivewealth, the dentist is treated the same as the doctor andwillconsequentlyhavethesameincometaxliabilityinthetaxingperiod.2.TaxingWealth

Awealthtaxbase,incontrasttoanincometaxbase,measuresastockofnetmarketwealthonaperiodicbasis.93Unlikean incometaxbase,awealthtaxbaseonly measured accretions from prior periods that were not consumed in thoseperiods,and thereforenecessarilydistinguishesbetweenpriorperiodsavingsand89 The approximate current interest rate on unsubsidized federal Stafford Loans.https://studentaid.ed.gov/sa/types/loans/subsidized‐unsubsidized#interest‐rates.905.25%ofthe$170,000balancedue.91$10,248.68.92Seenote84andaccompanyingtext.93See, e.g., thewealth taxbaseproposed inShakow&Shuldiner,note6, at532‐38 (encompassingfinancial holdings, business interests, other investment assets, and consumer durables and realestate above specified exemption levels).Because awealth taxbasemeasuresnetworth, thebasemustbecalculatednetofataxpayer’sdebt.See,e.g.,Piketty,note6,at537. Accountingfordebt isnecessary to consistently compare taxpayers under a wealth tax. If the wealth tax base is notcalculatednetofdebt,ataxpayerwith$1millionofcashand$1millionofdebtwouldpaythesametaxasataxpayerwith$1millionofcashandnodebt.


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consumption. A wealth tax base thereby accounts for the factor in economicspendingpowermissing froman incometaxbase:wealthresulting fromsaving inpriorperiods.Awealthtaxbase,however,islimitedinotherrespects,anddoesnotaccount for three factors in economic spending power that will vary acrosstaxpayers: (1) differences in labor income,which results frommonetizing humancapital; (2) differences in capital income, which results from the productiveinvestmentof thewealth;and(3)differences inthenumberofperiodsoverwhichthewealthmustbespread.

First, a wealth tax base does not account for differences in taxpayers’economicspendingpowerfromlaborincome. RecallTaxpayers1and3describedabove,theformerwith$1,000,000ofwealth,$25,000ofinvestmentincome,andnolabor income, and the latter with the same $1,000,000 of wealth and $25,000 ofinvestmentincome,butalso$75,000oflaborincome.94Althoughthetwotaxpayershave the same wealth stock and capital income earned thereon, Taxpayer 3 hasgreateroveralleconomicspendingpoweronaccountofheradditionallaborincome.

Second, a wealth tax base does not account for differences in taxpayers’economic spending power resulting from different amounts of capital incomeearnedfromthewealth. Astockofwealthrepresentsthepotential toearncapitalincomebutdoesnotindicatehow,orwhether,taxpayerswillrealizethispotentialby investing thewealth.95 For example, assume twowealthholders eachhave $1million.WealthHolder1holdshis$1millioninacheckingaccount,whichyieldsanegligibleinvestmentreturn.96WealthHolder2investsinariskyinvestment,whichyieldsan8%rateofreturn.97Thecapitalincometax,whichaccountsfordifferencesinhowwealthisinvested,wouldtreatthetwotaxpayersdifferently.Awealthtax,incontrast,doesnotaccountforthisdifference.98

94SeePartI.95In the samemanner, human capital represents potential labor income, but only taxpayerswhorealizethispotentialenjoytheresultingincreaseineconomicwell‐being.96Of course, there may be imputed benefits derived from a checking account, such as increasedliquidity.SeeYairListokin,TaxationandLiquidity,120YaleL.J.1682(2011).97Taxpayerssimilarlyenjoymoreorlesseconomicwell‐beingasaresultoftheirdecisionwhetherornottomonetizetheirhumancapital.Assume,inthealternative,thatTaxpayersCandDeachhavethepotentialtoearn$40,000ayearinlaborincome,which,atadiscountrateof4%,suggestsastockof human capital with a value of $1 million each. Taxpayer C productively employs this humancapitalstockandinfactearns$40,000ayearoflaborincome,whereasTaxpayerDhitsthebeachanddoesn’tearnacent.Theincometax,whichcomparesindividualsonthebasisoftheirlaborearningoutcomesandnotonthebasisoftheirearningpotential,willtaxTaxpayerCbutnotTaxpayerD.Inthis respect, the treatmentof TaxpayersA andC’s income, on the onehand, and the treatment ofTaxpayersBandD,ontheother,isconsistentandjustifiedunderabaseofeconomicwell‐being:Theformertwotaxpayerschosetoproductivelyinvesttheirwealthtogeneratemarketincome,whereasthelattertwodidnot. Humanandnonhumancapitalareequivalent inthisrespect. Inbothcases,taxpayerswithastockofeithercandecidewhethertousethestocktogenerateeconomicreturns.98IfWealthHolder2savesherinvestmentreturn,shewillhaveadditionalwealthtobetaxedinthenextperiodandwillpayahighertaxthanWealthHolder1inthatperiod.If,however,WealthHolder2spendsherinvestmentproceedsinthecurrentperiod,thewealthtaxwilltreatthetwothesameinthenextperiodaswell.Asdescribedabove,abasicdifferencebetweenawealthtaxandanincome


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Finally,awealthtaxdoesnotaccount fordifferencesintaxpayers’needstospreadtheirwealthacrossfutureperiods.Asdescribedabove,abasicconsequenceof a periodic wealth tax is that a single stock of wealth is subject to repeatedtaxation, as the wealth is held for a larger number of periods.99 Although thisfeatureiscommonlyraisedasanobjectiontowealthtaxation,100periodictaxationofwealthisrequiredfromtheperspectiveoftherelativeeconomicpowertheory.Ifataxpayer holds the wealth for a greater number of periods, the wealth reflectsgreatereconomicpowerforagreaternumberofperiods,withtheconsequenceofsocialandpoliticalharmsforagreaternumberofperiodsaswell.

The view thatwealth should be periodically taxed as a factor in economicspendingpower,however,doesnotnecessarilyimplythattheentirestockofwealthshould be taxed each period. Unlike a recurring income flow, a single stock ofwealthmay be depended upon to fund consumption acrossmultiple periods, andonce the stock is exhausted nothing remains.101 As succinctly stated by oneinvestment advisor, for retirees, “[their] money is it.”102 As a result, the wealthholder’s economic spending power will vary with the number of periods acrosswhich thewealthmustbespread,anda taxon the totalwealth stockeachperiodimposes the greatest burden on a pensioner who depends upon the wealth forconsumptionacrossagreaternumberofsubsequentperiods.Toillustrate,considertworetirees:

Retiree1has$100,000ofsavingsthatearnsareturnof2%ayear,or$2,000inthecurrentyear.Sheis70yearsoldandexpectstolivefor10moreyears.Retiree2has$100,000ofsavingsthatearnsareturnof2%ayear,or$2,000inthecurrentyear.Heis60yearsoldandexpectstolivefor20moreyears.

A tax onwealthwould treat both taxpayers the same, notwithstanding the

factthatRetiree1dependsonhersavingstolastfor10periods,whereasRetiree2dependsonhissavingstolastfortwicethatnumberofperiods.Althoughtheyhavethesamestocksofwealth,Retiree2mustsavemoreofhiswealthforthefutureandthereforehaslesseconomicspendingpowerduringthecurrentperiodthanRetiree1.

taxisthatthelatteraccountsforeconomicresourcesspentduringthetaxingperiod.SeediscussionatSubsectionIII.B.2.99SeeRakowski,note36,at337.100SeediscussionatSectionII.A.101Inotherwords, justasataxpayer’sdebtmayabsorbtheirperiodicincome,ataxpayer’sneedtofundconsumptioninfutureperiodsmaybeconsideredtoabsorbtheircurrentlysavedwealth.102JoanneKaufman,FuninEarlyRetirementCanBeHardWork,NewYorkTimes,Dec.24,2016,atB3.


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3.TaxingWealthbyTaxingCapitalIncome

Accordingtoacommonviewintheliterature,awealthtaxisredundantwitha tax on capital income sincewealth is implicitly taxed through a capital incometax.103Forasimpleillustration,assumethatataxpayerhas$100,000ofwealththatearnsa returnof2%peryear,or$2,000. If thewealth is taxedata1%rate, theresultingliabilitywouldbe$1,000.Thesameliabilitycouldbegeneratedbytaxingtheincomefromthewealthata50%rate.104Fromthisperspective,awealthtaxisduplicativewithacapitalincometax,andmoregenerallyanincometaxbaseofbothcapitalandlaborincomecouldservethesamefunctionasawealthtaxbaseofbothhumanandnonhumancapital.

Ifataxoncapitalincomeisreplicablethroughataxonwealthandviceversa,theonlychoiceremaining forpolicymakers is todeterminewhether it iseasier toobservewealthorcapitalincome.ProfessorsCunninghamandSchenkhaveargued,forexample,thatthetaxoncapital income,whichisoftendifficulttomeasureandsubjecttotaxreductionandavoidancestrategies,shouldbereplacedwithataxonadeemed return to the historic cost of wealth, with any additional gain or losscalculateduponasale,asundercurrentlaw.105Laborincomewouldremaintaxedas under current law, since an individual’s stock of human capital cannot bemeasuredexceptwithreferencetotheirobservedlaborincome.106Effectively,thisapproachoperatesasanimprovedmethodoftaxingthecapitalincomecomponentofthecurrentfederalincometaxbase,107ratherthanaqualitativeredefinitionofthetaxbase.108

103See,e.g.,Rakowski,note36,at286;Schenk,note6,at436‐38;Shakow&Shuldiner,note6,at500.104Assume thatperiodic income(i), equals the investedwealth (w) times the rateof return(r),or

.Awealthtaxontheprincipal(Tw)willyieldthesametaxliabilityasanincometax(Ti)when. Ineffect,convertingawealthtaxintoacapitalincometaxismerelyamatteroftaxinga

smaller base (capital income) at a higher rate. The substitutability between wealth and capitalincomebasesislimited,however,inonecriticalrespect.Inaprogressivetax,thebaseandtheratearenotperfectly interchangeablevariables, if it isassumedthat thebasecannotbe taxedataratehigherthan100%.Cf.Piketty,note6,at525‐26(notingthelimitedredistributiveeffectsoftaxinganarrowincomebaseatanextremelyhighrate).Intheexampleabove,a4%taxonwealth($4,000)couldonlybereplicatedthrougha200%taxonthe$2,000annualreturnonthewealth. Thatis, ifability to pay ismeasuredwith reference to the taxpayer’s annual income, imposing a $4,000 taxliabilityon$2,000of incomewouldaskthetaxpayertopaymorethantheyareconsideredabletopay.105SeeCunningham&DeborahH.Schenk,TaxationWithoutRealization:A“Revolutionary”ApproachtoOwnership,47TaxL.Rev.725,735‐36(1992);Schenk,note6,at446.Forexample,ifataxpayerpurchases stock for $10,000, and the deemed return is 1%, the taxpayer is taxed on $100 ofappreciationattheendofYear1,andherbasisinthestockincreasesto$10,100.Ifthetaxpayersellsthestockthefollowingyearfor$12,100,shepaystaxontheremaining$2,000ofgain,inamannersimilartothecalculationundercurrentlaw.106Schenk,note6,at465‐66.107In particular, this method avoids both the administrative costs of measuring actual capitalaccretionseachyearandthetaxplanningthatarisesfromthecurrentrealization‐basedsystem.108SeeRakowski,note36,at362(describingthisapproachasan“improvedincometax”).


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Settingasidetheseparatequestionofwhetheritismoreaccuratetomeasureactual capital income or a deemed return to cost, the analysis of this improvedincometaxbaseasameasureofeconomicspendingpowerduringthetaxingperiodwouldbesimilar toanalysisof thecurrent incometaxbase.109Recall the investorand the doctor described above. Assume that, under the deemed return to costmethod, the investor is taxed on an imputed annual return of 0.6% on her $35millionof savedwealth, the same rate that she actually earns by investing inU.S.Treasury notes,110for annual taxable income of approximately $200,000. Thedoctor is taxedonhis$200,000of labor income,asunder thecurrent incometax.Althoughtaxingthe investoron the imputed incomereturnmayachievethesamesubstantiveresultinthiscaseasacapitalincometax,thisapproachdoesnotyieldataxablebasethatmeasurestheinvestorandthedoctor’seconomicspendingpowerinsimilar terms. Bothare treatedashaving thesame$200,000of incomefor theyear,withnoseparateaccountingfortheinvestor’sadditionalspendingpowerfromherwealth. Asthisexampleillustrates,thereisnometaphysicalordefinitionalsenseinwhichwealthandcapital incomenecessarilyoverlap. Fromtherelativeeconomicpower perspective, both wealth and capital income measure different factors ineconomic spending power during the taxing period. Wealth at the start of theperiod measures economic spending power resulting from prior periodaccumulations. Capital income earned during the period reflects additionaleconomicspendingpowerresultingfromataxpayer’sdecisionwhetherandhowtoproductively invest their starting period wealth. For a simple example of thisdifference, consider a taxpayer who begins the year with $1000 of wealth, andinveststhiswealthfornearlytheentireyearata1%return,or$10,andspendstheentire$10onDecember31ofthatyear.Awealthtaxwillaccountforthe$1000ofstartingperiodwealth,butnotthe$10ofcapitalincomeearned,whereasacapitalincome taxwill account for the $10of capital income earnedbut not the startingperiod wealth. From the perspective of the relative economic power theory,however, the taxpayerenjoysgreatereconomicspendingpowerduring the taxingperiodfrombothfactors: herstartingperiodwealthaswellashercapital incomeearnedduringtheperiod. Previous treatments in the literature have been more troubled by thepractical—rather than the theoretical—effects of taxing both wealth and capitalincome. Even at low rates, taxing both a taxpayer’s entire stock of wealth eachperiod, aswell as her capital income, can have a cumulatively confiscatory effectovertime.111Forexample,assumethatataxpayerinvests$1000fortenyears,ata4%annualpretaxrateofreturn.Intheabsenceoftaxesoneitherwealthorcapital

109SeeSubsectionIII.B.1.110Seenote25andaccompanyingtext.111See,e.g.,Ackerman&Alstott,note6,at107(“Althoughawealthtaxisnoteconomicallyidenticaltoan incometax,both falloncapital investments. And insomecases, thecombinedratecouldbehigh...”).


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income, the taxpayerwill have approximately $1480 after ten years.112 If capitalincome is taxed each period at a 20% rate, the taxpayerwill have approximately$1370aftertenyears,113or93%ofthepretaxtotal.114If,incontrast,startingperiodwealth is taxed each period at a 2% rate (but capital income is not taxed), thetaxpayer will have approximately $1209 after ten years,115or 82% of the pretaxtotal.116If,finallybothstartingperiodwealthistaxedeachperiodata2%rate,andcapital income is taxed each period at a 20% rate, the taxpayers will haveapproximately $1119 after ten years,117or only 76% of the pretax total.118D.TaxingBothIncomeandWealth

As described in the previous section, neither income nor wealth isindependently sufficient to compare taxpayers by their total economic spendingpowerduringthetaxingperiod.Anincometaxdoesnotaccountfordifferencesinspendingpowerduringthetaxingperiodthatresultfromtaxpayers’savedwealth.In effect, an income tax understates the value of capital income relative to laborincome. A wealth tax, in contrast, does not account for differences in spendingpower that result from labor income, the productive investment ofwealth, or thenumberofyearsacrosswhichastockofwealthmustbespread.

Toaccountforthelimitationsofbothmeasuresasfactorsineconomicwell‐being,proposalsintheliteraturewouldtaxbothincomeandwealth. Forexample,David Shakow andReed Shuldiner propose taxingwealth under awealth tax andlaborincomeunderaseparateincometax.119Thisproposalexcludescapitalincomefromtheincometaxbase,onthegroundsthatthewealthtaxoperatesinlieuofataxoncapitalincome.120Ineffect,thisrationalemirrorstherationaleintheproposalbySchenkandCunninghamforataxoncapitalincomeinlieuofataxonwealth121andaseparatetaxonlaborincome.122112Thewealthwillappreciateuntaxedaccordingtotheformula 1 ,where(V)isthefinalvalue,(P)istheprincipal,(i)isthepretaxannual(orperiodic)return,and(t)isthenumberofyears(orperiods).Thus $1000 1 0.04 $1480.24113Inthiscasethewealthwillappreciateaccordingtotheformula 1 1 ,whereTCisthetaxrateoncapitalincome.Thus $1000 1 1 0.2 0.04 =$1370.24.114$1370.24/$1480.24115Inthiscasethewealthwillappreciateaccordingtotheformula 1 1 ,whereTWisthetaxrateonwealth.Thus $1000 1 0.02 1 0.04 =$1209.47.116$1209.47/$1480.24117In this case thewealthwill appreciateaccording to the formula 1 1 1 .Thus $1000 1 0.02 1 1 0.2 0.04 =$1119.59.118$1119.59/$1480.24.119See Shakow & Shuldiner, note 6, at 538‐44 (describing generally the authors’ proposal forseparatelaborincomeandwealthtaxes).120Seeid.at500‐501.121SeediscussionatSubsectionIII.C.3.122From this perspective, the biggest difference between an imputed return to historic cost and adirectwealthtaxisthatthelatterwillaccountforactualchangesinmarketvalueinyearspriortoarealizationevent.SeeSchenk,note6,at446.


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Theanalysisoftheseparatebasesofwealthandlaborincomeasmeasuresofeconomic spending power during the taxing period begins with the sameconsiderations in theanalysisof a taxonwealth above.123A taxonwealth alone,without regard to capital income earned from the wealth, will not account fortaxpayer decisions whether, and how, to productively invest their wealth.Consequently, taxpayers with the same wealth and different amounts of capitalincome resulting from the investment of their wealth are treated similarly.124Furthermore,awealthtaxwillnotaccountforcapitalincomeconsumedduringthetaxing period, which is an essential component of the income tax base. Finally, awealthtaxwillnotaccountfordifferencesamongtaxpayersintheirneedstospreadtheirwealthacrossdifferentnumbersofperiodsandwillconsequentlydisfavorthepensionerwhomustpreservetheirwealthforlonger.

If wealth, capital income, and labor income all independently factor intoeconomic well‐being, an alternative method would be to tax all of these factorsthrough a comprehensive income tax (on both capital and labor income) and aseparate wealth tax. The advantage of taxing both wealth and a comprehensiveincome base is that these bases cumulatively account for all of the factors ineconomicwell‐beingdescribedabove,which isnecessary to consistently comparetaxpayersbytheireconomicspendingpowerduringthetaxingperiodandtoavoidfavoringcapitalincomerelativetolaborincome.

Taxing these factors under separate instruments, however, faces anadditional and fundamental limitation to any attempt to tax total economicwell‐being by separately taxing the different factors in economic well‐being. For thereason described in Section III.A above, progressively taxing these bases underseparateinstrumentsisnotequivalenttoprogressivelytaxingeconomicwell‐beingfrom all factors under a single rate schedule. Stated in the terms of this Article,either base can serve in the calculating function of the progressive tax base, butneitherissufficienttoserveinthecomparingfunction.ConsideragainTaxpayers1,2,and3describedabove,whereTaxpayer1has$1,000,000ofwealth,$25,000ofcapital income,andnolaborincome;Taxpayer2hasnowealth,nocapital income,and$100,000oflaborincome;andTaxpayer3has$1,000,000ofwealth,$25,000ofcapital income, and $75,000 of labor income.125 Irrespective of the rate schedulechosenforeachinstrument,aseparatetaxonwealthwilltreatTaxpayer3thesameas Taxpayer 1, while a separate income tax will treat Taxpayer 3 the same asTaxpayer2.126Asa result,Taxpayer3’s incomeandwealthare taxedat thesamerate as those of Taxpayer 1 and 2, notwithstanding the fact that Taxpayer 3 hasgreater economic well‐being (measured as economic spending power during the

123SeeSubsectionsIII.B.1‐2.124Asnotedabove, themost likelypracticalreasonthisapproach isnot favored in the literature isbecauseofthecumulativelyeffectoftaxingbothcapitalincomeandwealth.Seediscussionatnotes111‐118andaccompanyingtext.125SeediscussionatPartI.126Orbetter,ifcapitalincomeistaxedatapreferentialrate.Seenote26.


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taxingperiod) thaneitherTaxpayers1or2,127and therefore shouldbe taxedat ahigheraveragerateonbothherincomeandherwealth.

Thethreetaxpayerscanonlybetreatedconsistentlyiftheireconomicwell‐being fromincomeandwealtharetaxedunderasingleprogressiverateschedule.The problem, however, is that income andwealth cannot be simply summed andtaxedundera single instrument,because the two factorsmeasureeconomicwell‐beingindifferentterms.128Asdescribedabove,incomeindicatesaperiodicflowofeconomic resources, whereas wealth reflects a fixed stock.129 Therefore, for anyfixed amount $X of wealth or $X of periodic income, the latter signals greatereconomic well‐being, and simply adding income and wealth yields inaccurateresults. For example, if income and wealth were both summed for each ofTaxpayers1and2,Taxpayer1wouldinaccuratelybetreatedashavingmorethantentimestheeconomicspendingpowerofTaxpayer2.130IV.ACombinedBaseofIncomeandWealth

This Part introduces a new base for progressive taxation, which is acombined base of economic well‐being from both income and wealth. A centralfeatureof thecombinedbase is thewealthannuity,derived frombothwealthandcapitalincome.Thewealthannuityoffersamiddlepathbetweenfavoringwealthbyonly taxingcapital incomeand including the fullwealthstock in the taxbaseeachperiod.Thewealthannuityvalue isaddedtoataxpayer’s labor incomeduringtheperiodtoyieldthecombinedbaseofeconomicwell‐being.Ineffect,thiscombinedbasewouldbea limited intervention to the taxsystem,whichwouldpreserve thecurrentincometaxationofbothlaborandcapitalincomeandthenaddtothisbaseaportion,butnotall,ofataxpayer’swealth.

This combined base resolves the core concerns of this Article. First, thecombinedbasemoreaccuratelyreflectseconomicspendingpowerduringthetaxingperiod than eitherwealth or income. As a result, the combined base serves as a

127TheanalysisinthiscaseisthesameastheanalysisofthelimitationsofseparatelytaxingdifferentattributesdescribedinaboveinSectionIII.A.AssumethatC1isthemeasureoftaxpayer’seconomicwell‐beingduring the taxingperiodandthat, fromaperspectiveof limiting inequalityofeconomicpower,taxpayersshouldbecomparedbythismeasure.Ifincome(I)andwealth(W)arebothfactorsin economic well‐being, then C1 ƒ I, W . Under a progressive rate schedule with increasingmarginalrates,separatetaxesonIandWarenotequivalenttoasingletaxonC1.Usingthenotationinnote68above,thismaybeexpressedas .128That is,C1 isa functionof incomeandwealth,orC1 ƒ I,W ,butthefunctionisnotthesimplesumofthefactors,aswasthecaseinnote66whereƒ I,W I W.129SeeSubsectionsII.C.1‐2.130ThesumofTaxpayer1’s incomeandwealthis$1,025,000,whileTaxpayer2’s isonly$100,000.Taxpayer1doesnothavetentimestheeconomicspendingpowerofTaxpayer2,sinceTaxpayer1’s$1,000,000ofwealthisastockthatwillbeexhaustedifspentinthetaxingperiod,whileTaxpayer2’s$100,000ofincomewillrecurtotheextentthisamountrepresentsaperiodicincomeflow. Stateddifferently, if Taxpayer 2 has additional earning ability in subsequent years, his stock of humancapitalisgreaterthan$100,000.


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moreappropriatebase forreducing inequalityunder therelativeeconomicpowertheory. Second, thecombinedbaseharmonizes the treatmentofcapitaland laborincome and allows for comparing taxpayers with different levels of income andwealthinequivalentterms.Asaresult,economicwell‐beingfrombothfactorscanbeconsistentlytaxedunderasingleprogressiverateschedule.

Sections IV.A and IV.B describe, respectively, the wealth annuity and thecombined base of income and wealth. Section IV.C addresses real‐worldconsiderations in calculating the combined base. Section IV.D compares thecombined base of income andwealth to two other alternative tax instruments: awealth transfer tax, such as an estate or inheritance tax, and a consumption tax.Finally, Section IV.E addresses in greater detail two common objections to taxingeitherincomeorwealth,onfairnessandefficiencygrounds.A.TheWealthAnnuity

As described above, income and wealth cannot be taxed under a singleprogressive tax instrument until they are translated into terms that measureeconomicwell‐being consistently. Labor income reflects a return of a portion oftaxpayer’s principal of human capital.131 Capital income, in contrast, generallymeasuresaninvestmentreturnbutnotareturnoftheprincipal.132Finally,awealthstockrepresentsataxpayer’sentirewealthprincipal.133

These differing measures can be reconciled by translating a taxpayer’swealthatthebeginningoftheperiodandcapital incomeearnedduringtheperiodinto a hypothetical annuity value.134 The wealth annuity value converts a fixedwealth stock into a periodic flow over a number of periods, such that an equalamount would be returned each period.135 In effect, this measure reflects theamount of periodic income the wealth would be expected to generate over the

131SeeSubsectionII.C.1.132Seeid.133SeeSubsectionII.C.2.134Cf.themethodologyinTaussig,Weisbrod&Hansen,note29.Awealthannuityconcepthasbeenpreviouslysuggestedinthewelfareeconomicsliterature,butithasnotbeengenerallyacceptedasameasureofeconomicwell‐beingandhasnotbeenproposedasabase forprogressive taxation. Inbothcauses,themostlikelyexplanationforitslackofbroaderapplicationinthetaxliteraturepriorto this Article is due to the fact that the wealth annuity, like any wealth measure, distinguishesbetweenconsumptionindifferentperiodsandthereforedoesserveasameasureofeconomicwell‐beingoverthecourseofone’slifetime.See,e.g.,thepassingdismissalofthisconceptfromalifetimeperspective inVictorThuronyi,TheConceptof Income,46TaxL.Rev.45,98(1990). Therelativeeconomicpower theory,however, isconcernedwithdifferences ineconomicspendingpowereachperiodandnotonalifetimebasis.SeediscussionatSectionII.B.Withinthisframeworkthewealthannuityconcepthasnewrelevanceandapplicationforthedefinitionoftheprogressivetaxbase.135The formula for calculating the periodic annuity returnA derived from a stock ofwealthW is

, where r is the taxpayer’s positive rate of return on saved wealth and n is the

numberofperiodstheannuityispaid.Citetobasiccorporatefinancetextbook.


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annuity holder’s remaining lifetime. Each year, an actual annuity holder receivesback a portion of their principal, as well as an investment return on theiroutstanding principal. At the end of the annuity period, the entire principal hasbeenreturned,andnoadditionalvalueremains.Similarly,thewealthannuityvalueusedinthecombinedbaseestimatestheamountofprincipalthatwouldereturnedeachyearifanactualannuitywerepurchasedbythetaxpayer.

Forexample, ifTaxpayer3has$1,000,000ofwealth, andearns$25,000ofcapitalincomeintheyear,implyinga2.5%rateofreturnfortheyear,theannuityvalue over 11 years is approximately $100,000.136 In the first year, the annuityamountequalsthesumofthe$25,000ofcapitalincomeearnedduringtheyearanda return of $75,000 of the wealth principal. In subsequent periods, the annuityvalue would be recalculated based on the taxpayer’s starting wealth and capitalincome in those periods, in the same manner that income and wealth arerecalculatedeachperiodunderincomeorwealthtaxes.

The wealth annuity reflects a partial return of capital, as well as aninvestmentreturnontheprincipalbalance.Asaresult,thewealthannuitytaxbasediffersfromboththecapitalincometaxbaseandfromawealthtaxbaseincriticalrespects.First,andunlikeawealthtaxbase,thewealthannuityaccountsforcapitalincomeearnedduringtheyearandthereforedistinguishesbetweentaxpayerswithdifferentdecisionsonwhether,andhow,toinvesttheirwealth.

Thewealthannuityaccountsforbothwealthandcapitalincomebutdoesnotaccountfortheentirestockofwealthinanysingleyear,asaportionofthewealthprincipal is excluded to account for hypothetical annuity payments in futureperiods.Asaresult,thewealthannuityalsodistinguishesbetweentheamountofataxpayer’swealth considered disposable during the taxing period and an amountpreservedforfutureperiods.137Forthesamereason,thesizeofthewealthannuityvalue varies with the number of periods the wealth is expected to last anddistinguishes between taxpayerswith differentneeds to save theirwealth for thefuture.

From the perspective of the relative economic power theory, the wealthannuity therefore yields a more accurate measure of economic spending powerduringthetaxingperiod.AsdescribedinSectionII.B,therelativeeconomicpowertheorydependsuponthecrediblethreatbythosewithgreatereconomicpowertoexpendtheirresourcestoasserttheirownpreferences.Thepensionerwithwealththatmustbesavedforthefuturecannotcrediblymakethisthreatandtothisextentshouldnotproperlybeconsideredtohavegreatereconomicpowerasaresultofherwealth.Incontrast,ataxpayerwithgreaterdisposablewealthinthecurrentperiodwillhavegreatereconomicpower.

Thewealthannuitymeasureshowmucheconomicpowerisavailablefromagiven stock of wealth by distinguishing between wealth that is available in the

136$102,542.40.137Thewealthannuityisnotmeanttopredicttheamountofwealththatwillactuallybeusedbythetaxpayer in the period. Rather, thewealth annuity compares relative spending power during thetaxingperiod.


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currentperiodandwealththatmustsavedforthefuture.Underthewealthannuity,apensionerwhomustsaveforthefuturewillonlybetreatedashavingaportionofthe principal available in the current period. If the pensioner expects to live forlonger,andthereforemustsavetheirwealthforagreaternumberofperiods,thenevenlessofthewealthwillbeconsidereddisposableinthecurrentperiod.

Asapointofclarification,thepurposeofthewealthannuitycalculationisnotto factually predict the future economic experience of the taxpayer. In futureperiodsa taxpayermayearnadifferent rateof return,or theymayhavemoreorlesswealth,andeachofthesechangeswillaffecttheannuityvalueinthoseperiods.Inasimilarmanner,observinga taxpayer’sannual incomeorwealthaloneduringthe taxing period does not predict their economic circumstances in futureperiods.138Rather,thepurposeofthewealthannuityistomeasurethetaxpayer’seconomic spending power each period fromwealth and capital income, using theavailable data points ofwealth at the beginning of the period and capital incomeearnedduringtheperiod.

B.TheCombinedBase

Thecombinedbaseisthesumofthewealthannuityplusthetaxpayer’slaborincome during the taxing period. For example, Taxpayer 3’s $100,000 wealthannuityvalue139wouldbeaddedtoher$100,000oflaborincome,andthis$200,000sum would be taxed under a single progressive rate schedule. In effect, thecombinedbasebeginswith the samebaseofboth labor and capital income taxedunderthecurrentfederalincometaxbaseandthenaddsaportionofthetaxpayer’swealth.

Under the combined base, taxpayers are treated consistently regardless ofwhethertheireconomicwell‐beingderivesfromincome,wealth,orboth.Considerthe treatment of Taxpayers 1, 2, and 3 under a single progressive tax on thecombinedbase.Assumethattheinstrumenttaxestheintegratedbaseaccordingtothefollowingrateschedule:20%ofthefirst$100,000,plus40%ofanyadditionalamounts.140 Taxpayers 1 and 2 are each treated as having a taxable base of$100,000fortheperiod(Taxpayer1deriveshereconomicwell‐beingfromwealth,and Taxpayer 2 from labor income), for a tax liability of $20,000 each and anaveragetaxrateof20%each.Taxpayer3willbetreatedashavingataxablebaseof

138Similarly,onecanimagineadditionalfactorsthataffectataxpayer’seconomicwell‐beingandthatare not easily accounted for in the tax system. For example, a taxpayer may have other futurefinancial obligations that are not currently observable as debt (negative wealth) and are moreappropriately analogized to contingent liabilities. Another taxpayer may reasonably anticipate afuture stock of wealth in the form of a gift or bequest. These assets and liabilities can only beobservableinfutureperiodsoncetheyarerealized.139Seenote136andaccompanyingtext.140Theratesusedherearepurelyillustrative,andwilldependonthedegreeofaversiontoinequalityandthedifferentbehavioralresponsestothetaxationofdifferentcomponentsofthebase.


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$175,000fortheperiod,resultingfrombothherincomeandwealth.141Taxpayer3willpayatotaltaxof$50,000onthisbase—20%onthefirst$100,000and40%onthe remaining $75,000—for an overall average rate of approximately 28%.142Taxpayer3 isappropriatelytaxedathigheraverageratesonbothher incomeandherwealth,onaccountofhergreatereconomicpowerduringthetaxingperiod.

The combined base also allows for more consistent treatment of negativewealth,ordebt.Recallthedoctordescribedabove,143whohasnegativewealthfrommedical school debt and must make a payment of $10,000 each year.144 Thispaymentreflectsaportionofthedebtprincipalandinterestpaidontheoutstandingbalance. The amortization payments owed on negative wealth reflect reducedeconomicspendingpowerinthetaxingperiod,inthesamemannerthatthewealthannuity from positive wealth reflects increased economic spending power in thetaxingperiod.Underthecombinedbase,thedoctorwouldbetreatedashavingonly$190,000ofavailableeconomicspendingpowerinthetaxingperiod.145Thedoctorwill pay a total tax liability of $56,000,146 for an overall average rate ofapproximately29%.147Comparethetreatmentofthedoctortothedentist,whohas$200,000 of income and no debt.148 The dentist will pay a total tax liability of$60,000, foranoverallaveragerateofapproximately34%.149Althoughbothearnthe same income, the dentistwill paymore in tax because they do not also havedebt.

The combined base also accounts for differences in economic spendingpoweramongtaxpayerswithsimilaramountsofsavingsbutwhoexpecttospreadthe wealth across different numbers of future periods. Consider the pensionersexampleabove,150whereRetiree1andRetiree2eachhave$100,000ofsavings,andeachearnsareturnof2%ayear.Retiree1,however,isexpectedtolivefor10moreyears, whereas Retiree 2’s savings must stretch for an expected 20 years. Thewealth annuity quantifies the difference between the retirees’ economiccircumstances. With respect to Retiree 1, $100,000 of savings generating a 2%141ThesumofTaxpayer3’s$75,000laborincomeandapproximately$100,000annuityvaluefromwealthandcapitalincome.Seenote136andaccompanyingtext.14228.57%.143Seenotes23‐25,88‐89andaccompanyingtext.144Of course, a particular debt obligation is likely to have a shorter repayment period than thetaxpayer’sexpectedlifespan. Underawealthtax,thisproblemdoesnotarisebecauseawealthtaxfailstoaccountfornumberofperiodsacrosswhichthewealthmustbespread.Recall,however,thatthepurposeofthewealthannuityisnottopredictactualeconomiceventsinsubsequentperiodsbutrathertomoreconsistentlycomparetaxpayers inthecurrentperiod. Itwouldbeadministrativelyunfeasibletoseparatelyaccountforthepaymenttermsofeveryfinancialinstrumentandinvestment.This limitationmaybe considered an example of the general principle that the tax systemcannotaccountforallfactorsthataffectataxpayer’seconomicwell‐being.Seenote138.145The labor income of $200,000 less the negative annuity value of ($10,000) on account of thedoctor’snegativewealth.14620%of$100,000plus40%of$90,000.14729.47%.148SeeSubsectionIII.B.2.14934.29%.150SeeSubsectionIII.B.2.


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annualreturnwouldyieldanannuityofapproximately$11,000peryear151overa10‐yearperiod.WithrespecttoRetiree2,thesamesavingsandreturnwouldyieldan annuity of approximately $6,000 per year152over a 20‐year period. BecauseRetiree 1’s savings are expected to be spread over fewer years, Retiree 1 has ahighertaxablebaseunderthecombinedbase.

Ifasaveralsohaslaborincome,theywillappropriatelybetreatedashavinggreatereconomicspendingpower,holdingconstanttheamountofsavingsandthelifeexpectancy.Consideranadditionaltaxpayer,Worker1who,likeRetirees1and2,has$100,000of savings thatearnsa2%annual returnandwho, likeRetiree2,expectstolivefor20moreyears. Worker1,however,alsoearns$10,000oflaborincome each year. Worker 1 is treated as having available economic spendingpowerof$16,000inthetaxingperiod,resultingfromthe$10,000of laborincomeandthe$6,000annuityvaluefromsavedwealth,andwouldconsequentlybetreatedas having greater economic spending power than Retiree 2 who has the samewealthbutnotlaborincome.

Finally,considerthedifferenttreatmentofthedoctorandtheinvestor,whichrepresentsacaseofincomeequalitybutsubstantialwealthinequality.Toholdlifeexpectancyconstant,assumethatbothareexpectedtoliveforanother40years.Asdescribed above, the doctor will have net income of $190,000 for the year, aftermakingthe$10,000debtpayment.153Theinvestor’s$35millionwealth,assuminginvestor’s investment return of 0.06%, would yield an annuity of approximately$980,000peryearovera40‐yearperiod.154Oncetheinvestor’swealthistranslatedtoanannuityvalue, the investor’smuchgreatereconomicwell‐being isevident. Ifthecombinedbaseistaxedattherateschedulespecifiedabove,thedoctorpaysthetotal tax liability of $56,000 described above, for the overall average rate ofapproximately 29%.155 The investorwill be treated as having available economicresources of $980,000,156and will consequently pay a total tax liability of$372,000,157foranoverallaveragerateofapproximately38%.158151$10,914.37.152$5,995.76.153After the debt is paid off in 10 years, the doctor will no longer have negative wealth andconsequentlywillbetreatedashavinggreatereconomicwell‐beinginthosetaxingperiods,thesameasifthedoctorhadnodebttobeginwithbutincreasedhissavingsduringthattime.154$980,920.32.155Seenotes146‐147andaccompanyingtext.156Seenote154andaccompanyingtext.15720%of$100,000plus40%of$880,000. This amountapproximatelyequivalent to the liabilityresultingfroma1%wealthtaxontheinvestors$35millioninwealth,orhalfofProfessorPiketty’sproposedtopmarginalrate.SeePiketty,note6,at517.Althoughtheratesusedinthisexamplearehypothetical, this example illustrates how, unlike periodic taxes on both capital income and ataxpayer’s entire wealth stock, a tax on the combined base can result in a lower cumulative taxliability,eveniftheportionofthewealthprincipalistaxedatahigherratethantheratesproposedinthe literature fora taxonthe taxpayer’sentirewealthstock. Seediscussionatnotes111‐118andaccompanying text (on the cumulative effect of taxing both the entire wealth stock and capitalincomeeachperiod).Thesimplereasonforthisdifferenceisthecombinedbasewillgenerallyuseasmallerwealthbasethanunderafullwealthtax.15837.96%.


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C.Real‐WorldConsiderations

This section addresses real‐world considerations in taxing income andwealth,orthecombinedbaseofboth.Ingeneral,calculatingthecombinedbaseofeconomic well‐being generally requires the same basic information as requiredunder incomeandwealth taxes: the taxpayer’sstockofwealthat thebeginningoftheyearandtheircapitalandlaborincomeduringthetaxingperiod.159Therateofreturnonthe taxpayer’swealth, forpurposeofdetermining thewealthannuity, isderived from thedatapoints of startingperiodwealth and capital incomeearnedduringtheperiod. Acommon theme in thediscussion that follows is thatanybaseof income,wealth, or a combination thereof will encounter complications in measuring andcharacterizing different elements of the tax base. In many cases, thesecomplications canbeaddressed, at a costof additional administrative complexity.The question of whether these complications should be resolved at additionaladministrativecost,however,isinmanycasesaseparatepolicydeterminationfromthechoicebetweentaxingincomeandwealth.Thisisbecause,asdescribedbelow,manyofthesamemeasurementcomplicationspresentundereitheranincometaxorawealthtax.Asaresult,thepresenceofthesecomplicationsdoesnotnecessarilyimply that policymakers should prefer one base to the other, and for the samereasonshouldneitherfavornordisfavorthecombinedbaseofboth.1.ObservingandMeasuringIncomeandWealth

Scholars divide on the question of whether it is easier to observe andmeasure a base of income or wealth. 160 Whereas the income calculationnecessitatesdeterminationsoftimingandcharacter,themeasurementofwealthistheoretically simpler, since theonlydeterminationnecessary is theasset value.161Ineffect,however,themostsignificantadministrativechallengetoawealthtaxbaseis the same challenge to an income tax base: the treatment of irregularly tradedassets without discernible market value. Under a wealth tax, cash and financialassets are easily valued,162in the same manner as the appreciation of financial

159The final data point required to calculate thewealth annuity, the taxpayer’s life expectancy, isdiscussedbelowatSubsectionIV.C.3.160Contra, e.g., Kleinbard, supra, at 600 (arguing that capital income flows are often easier tomeasure)withShakow,note6,at951(“Aftermorethanonehundredyearsofexperiencewiththeincometax, thatpresumption isworthreexamining.Althoughitmaystillseemdifficult toevaluateeveryone’s wealth, the growth in size and complexity of the federal income tax suggests thatmeasuringincomemaynotbeaseasyaswasfirstbelieved.”)161Shakow,note6,at950.162Fleischer,note34,at16‐17.


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assets under an income tax.163 Non‐traded or unique assets, however, may bedifficultorimpossibletovalueforpurposesofawealthtax,164forthesamereasonthat the appreciation of these assets is difficult to determine for purposes of anincometax.

AsdescribedaboveinSectionIII.B,thedefinitionofbothincomeandwealthwillalsodependonanormativedeterminationofthesourcesofvaluethatshouldfactorintoeconomicwell‐being.Inthiscase,however,thenormativeboundariesofthe income and wealth definitions accord with the administrative challenges ofmeasuringassetvaluesandappreciation, since theassets thatareeasiest tovaluearealso theclearest indicatorsofeconomicspendingpower. Asdescribedabove,appreciation of regularly traded assets is readily observable,165and therefore anmark‐to‐market income tax on this appreciation would not pose significantadministrative challenges. For the same reason, the valuation of these assets forpurposesofawealthtaxwouldbeadministrable.Inthecaseofnontradedassets,aruledeferringtaxationuntilasaleorotherrealizationevent—withanappropriateinterest charge to account for the benefit of deferral—would be equallyadvantageousforbothanincomeandawealthtax.166

The challenges todefiningandobserving incomeandwealtharenoeasier,andnoharder,under thecombinedbaseofboth. In thecaseof irregularly tradedassets,asimilarretroactivemethodmaybeusedtodeterminethetaxliabilitydueupon a sale. Upon realization, the asset value and rate of appreciation over theasset’sholdingperiodmaybedetermined,whichprovidessufficientinformationtoretroactivelydeterminetheannuityvaluefromholdingtheassetforeachyearandto tax these annuity values under the applicable rates for these years, with aninterestchargetoaccountforthedeferralbenefit.1672.NonperiodicIncome

As described above, the basic distinction in the literature between wealthandincomeisthatwealthisafixedstockandincomeaperiodicflow.168Intherealworld,however,incomeisseldomperfectlyperiodic.Ataxpayermaylosetheirjob,

163SeeGlogower,note81,at128‐29.Thatis,ifthevalueofanassetisreadilyobservableeachyear,forthepurposesofmeasuringawealthtax,changesintheasset’svaluearesimilarlyobservable,forpurposesofmeasuringanincometax.164SeeFleischer,note162,at17‐18.165Seenote81andaccompanyingtext.166See,e.g.,themethoddescribedinGlogower,note81,at146‐47.167Asdescribedabove,ProfessorsCunningham&SchenkproposeimputinganannualreturntocostforcertaincapitalassetsandtaxinganyresidualgainsorlossesgainsupondispositionSeenote104and accompanying text. This same insight could also be incorporated into the combined basecalculation,inaslightlydifferentfashion.Insteadoftaxingtheownerunderanincometaxbase,onan imputed return to cost, the imputed return to costmay be used under the integrated base toestimatetheannuityvalue.Theadditionalgainsorlosses,uponasubsequentdisposition,willadjustthe annuity valuation in that year, in the samemanner that the incomeamount is adjustedunderProfessorCunningham&Schenk’sincometaxbase.168SeeSectionIII.B.


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receive a raise or a demotion, or retire. The most consistent comparison oftaxpayers would account for the degree to which their labor income is periodic.Thisinformation,however,isnotavailableuntiltheendofataxpayer’slife,forthesame reason that their total stock of human capital is not observable until thattime.169

This problem of “lumpy income” poses a challenge to any tax base thatincludes labor income. Underaprogressive income tax, theproblem is limited totheeffectthattheprogressivemarginalrateschedule imposesa largertaxburdenontaxpayerswithintermittentperiodsofhigherincomethanonthosewithsteadierandmoremodest income flowsofequalcumulativevalue.170Theproblemcanbemore pronounced, however, under a systemwith separate taxes on labor incomeandwealth, such as under the proposal by David Shakow and Reed Shuldiner.171Thisisbecauseataxpayerwithahighlaborincomethatisnotlikelytoberepeatedwillneedtosaveaportionoftheirincometocompensatefortheexpectedshortfallin subsequent years. As a result, the taxpayerwill be taxed on their entire laborincomeinthefirstyearundertheincometax,aswellasthewealthsavedfromtheincome insubsequentyearsunder thewealth tax. Incontrast,a taxpayerwithanequalamountoflaborincomeearnedoveraperiodofyears(andspenteachyear)willonlybetaxedontheincomeandwillnotfaceanadditionalwealthtaxliability.The same problem presents under the combined base, although not to the samedegreeasasystemthatfullytaxeslaborincomeaswellasataxpayer’sentirewealthstock each period. This is because only a portion of the taxpayer’s wealth isincludedinthetaxbaseeachperiod,whereastheportionofwealthtreatedassavedforfutureperiodsisexemptedfromfuturetaxation.

The impossibility of predicting the periodicity of labor income in advanceleadstoarangeofimperfectoptionsforanytaxbasethatmeasureseconomicwell‐being. The first option is to avoid exacerbating the penalty to lumpy income byignoring the role of wealth entirely. While this approach limits the penalty totaxpayerswhoearnahighincomeandsubsequentlysaveaportionforfuturelower‐earningyears,omittingwealthfromthetaxbasealsowillalsogenerallydisfavoralllaborincomeearnersrelativetowealthyinvestors.Taxingataxpayer’sentirestockofwealtheachperiodunderawealthtaxresultsinthegreatestadversetreatmentoftaxpayerswhoearnlumpylaborincome.Fromthisperspective,thecombinedbaseoffers a middle ground that mitigates, but does not eliminate, the disfavoredtreatmentoflumpyincome,withoutentirelyignoringtheroleofwealthasafactorineconomicwell‐being.

169Of course, labor incomepartially indicatesperiodic earning capacity. Inmany cases, taxpayersmayalsobeabletosmooththeirlaborincomeflowsacrossperiods.Forexample,ataxpayermaybeable to purchasewageor disability insurance, find stable employment, or “anchor” their salary infuturepositionsonthebasisoftheirsalaryinpriorpositions.170This long‐recognizedconcernwasaddressed in thewritingsofWilliamVickrey,whoadvocatedforasolutionthataccountedforcumulativeincomeflowsacrossataxpayer’slifetime. SeeWilliamVickrey,AveragingofIncomeforIncome‐TaxPurposes,47J.Pol.Econ.379(1939).171SeediscussionatSubsectionIII.C.3.


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3.UncertainLifeExpectancy

In order to convert the stock of wealth into a periodic flow, the wealthannuity accounts for the taxpayer’s life expectancy. Any number used will benecessarily imprecise, but such calculations are regularly undertaken to calculateactualannuityvaluesundercurrentlaw.Section7520oftheCoderequirestheIRSto publish actuarial tables and to value annuities, life interests, and reversionaryinterests172under the estate, gift, and income taxes. These tables could be easilyrepurposed in order to calculate the wealth annuity component of the combinedbase.

Taxpayerswho outlive, or predecease, their expected lifetime can both betreated equitably under the combined base. First, a taxpayer who has themisfortunetodiesoonerwillhavebeentreatedashavinglesseconomicwell‐beingandthereforealowertaxliabilityinprioryearsthantheliabilityindicatedbytheiractuallifespan.Thisresultisunlikelytobeobjectionabletotaxpayers,asthiscasemitigates the tax liability for those who die unexpectedly early. The moreinequitablecaseiswhereataxpayeroutlivestheirexpectedlifespanandasaresultpaystoomuchintaxinpriorperiods,onthebasisofhigherassumedannuityvaluesinthoseyears.Suchataxpayerisalreadyatagreaterriskofoutlivingtheirsavings,and this financial strain would be increased if the taxpayer faces a higher taxliability. In thiscase, thegovernmentcould issuearefundablecredit to taxpayerslivingbeyondtheirexpectedlifespanfortheexcesstaxespaidinprioryears.4.Exemptions Policymakerscanalsosetminimumexemptionlevelsunderanincometax,awealthtax,orunderthecombinedbase.Underthefederalincometax,thepersonalexemptionunder§151exemptsthefirst$4,050ofincomeforeachindividualinthetaxpayingunit.173Thepersonalexemptionoriginated in thenotion that taxpayersshouldonlybetaxedon“clearincome”abovealeveldevotedforbasicnecessities.174Proposals for awealth tax have similarly included aminimal exemption level, sothat wealth is only taxed above a level of savings necessary for basic financialsecurity.175

172 IRC § 7520(a)(1). For the current actuarial tables, see IRS, Actuarial Tables,https://www.irs.gov/retirement‐plans/actuarial‐tables (last visited May 19, 2017); see also IRS,Publication1457:ActuarialValuations(2009),https://www.irs.gov/pub/irs‐pdf/p1457.pdf.173IRC§151(a), (c); IRSREV.PROC.2016‐55at18, https://www.irs.gov/pub/irs‐drop/rp‐16‐55.pdf(inflation adjustments for 2017). The exemption phases out above a threshold of adjusted grossincome.IRC§151(d)(3).174See Edwin R.A. Seligman, Progressive Taxation in Theory and Practice 80‐81, 129‐30, 159‐61(1894).175See,e.g.,Shakow&Shuldiner,note6,at547(proposinganexemptiononthefirst$40,000ofnetwealthin1999dollars).


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Exemptionsforbasic levelsofincomeandwealthmayalsobeincorporatedintothebasecalculationunderthecombinedbase. Thecombinedbasealsoofferspolicymakersadditionalflexibilityinstructuringexemptionlevels,sinceexemptionscanbemadeonaseparatebasisforminimalamountsofincomeorwealthasfactorsinthecombinedbase,oronacombinedbasisasanintegratedexemptionforboth.Under separate income and wealth taxes, in contrast, an integrated exemptioncannotbeconsistentlyapplied,forthesamereasonthatincomeandwealthcannotbe consistently compared and taxed across taxpayers through separateinstruments.176 The combined base can also accommodate asset‐specific exemptions, toalleviate perceived hardship on taxpayers or advance other policy goals. Forexample, the incometaxbasecurrentlyexcludesupto$500,000ofgainsfromthesaleofaprimaryresidence,177andallowsadeductionformortgageinterestpaid.178These preferences have been justified as a subsidy to home ownership and assetvalues, and to alleviate the compliance burdens faced by taxpayers.179 Either awealthtaxbaseorthecombinedbaseofincomeandwealthcouldsimilarlyexempta minimum amount of net wealth attributable to a taxpayer’s primary residencefromthebasecalculation.D.ContrastedwithOtherTaxBases1.AnEstateorInheritanceTax

Wealth transfer taxes such an estate or inheritance tax limit theaccumulationandtransmissionofdynasticwealthacrossgenerations,andtheroleof privilege and the lottery of birth in economic inequality.180 An estate tax iscalculated by reference to the decedent’s estate, while an inheritance tax is

176For example, Professors Shakow& Shuldiner suggest integrating a $5000 exemptionunder thelaborincometaxwiththe$40,000exemptionunderthewealthtaxbyuseofaunifiedcreditagainstthe tax liability fromboth. As described above in Section III.D, however,without first translatingincomeandwealthintoconsistentmeasuresofeconomicwell‐being,thereisnowaytoconsistentlytaxbothasfactorsineconomicwell‐beingunderaprogressiveratestructure.Forthesamereason,acreditagainstthecumulativetaxliabilitycannotconsistentlyexemptaminimumlevelofeconomicwell‐beingfrombothfactors.177IRC§121.178IRC§163(h).179See, e.g., Staff of the JointComm.onTax'n, 104thCong.,GeneralExplanationofTaxLegislationEnacted in1997,at54‐55(Comm.Print1997) (concern forcomplianceburdenon taxpayers fromcalculatinggainonsaleofresidences.).180SeeThomasNagel,LiberalDemocracyandHereditaryInequality,63TaxL.Rev.113(2009).


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calculatedbyreferencetotheamountreceivedbyeachbeneficiaryoftheestate.181Scholars favoring an inheritance tax to an estate tax argue that the latter onlyprovides a “rough justice” of distributional equitybecause it doesnot account fordifferent the amounts receivedbydifferent estatebeneficiaries.182 In contrast, aninheritancetaxwouldtaxinheritancesreceivedbyeachbeneficiary183andtherebyaccountfortheactualeconomicbenefitreceivedbyeach.

Thecriticaldistinctionbetweenaperiodicwealthtax,onetheonehand,andeitheranestateor inheritance tax,on theother, is that the latter instrumentsareone‐time leviesupon the transferofwealthacrossgenerations. Neitheranestatetaxnoraninheritancetaxaccountsforthenumberofperiodsthewealthisheld.Asaresult,neitherinstrumentwillcontinuouslyconstraineconomicinequalityduringa taxpayer’s lifetime, which is implied under the relative economic powerframework. Bothestate and inheritance taxes also imply thatdeath is auniquelyappropriate timetoassess taxes. This feature invitescommoncharacterizationofthecurrentestatetaxasa “death tax”184that isexogenous to thenormal taxrulesthat operate during the wealth holder’s life. The “death tax” label renders suchinstrumentspoliticallyvulnerable185andobscuresthecontinuousroleofwealthasafactorininequalitythroughouttheholder’slife.186

Thecombinedbaseofincomeandwealthcanpreventtheperpetuationandtransmission of dynastic wealth without the need for a separate estate orinheritance tax. Furthermore, the combined base would constrain excessiveeconomic inequality continuously, rather than once each generation upon thetransmission of wealth from a decedent to beneficiaries. Near the end of ataxpayer’s life, the combined base effectively operates as gradual estate tax byincludingincreasingamountsofsavedwealthinthetaxablebaseeachperiod,whileensuring that the taxpayerwill neverexhaust their savings through taxpaymentsbeforetheendoftheir life. Fromtheperspectiveoftheestatebeneficiariesinthenext generation, the combined base operates in a parallel fashion. An heir whobeginslifeinapositionofprivilegefrominheritedwealthwillsimilarlybeginlifebypayingtaxeseachperiodonthisinheritancethroughthewealthannuitycomponent

181See Lily L. Batchelder,What Should Society Expect fromHeirs? The Case for a ComprehensiveInheritanceTax,63TaxL.Rev.1(2009).For2017,thefederalestatetaxrateis40%ofgrossestatesandgiftsaboveanexemptionlevelof$5.49million.IRC§2001,2010.182SeeBatchelder,supra,at53‐56(ontheinequitableandinconsistenttreatmentofindividualheirsunderanestatetax).183For example, Professor Batchelder’s proposalwould include inheritances above $1.9million astaxableincome,taxedattheordinaryincomeratesplusa15%surcharge.Seeid.at58‐67.184See,e.g,HouseGOP,ABetterWay:OurVision foraConfidentAmerica:Tax16(June24,2016),https://abetterway.speaker.gov/_assets/pdf/ABetterWay‐Tax‐PolicyPaper.pdf (proposal to repealtheestatetaxandthegenerationskippingtransfertax“sothatthedeathofafamilymemberorlovedonenolongerwillbeataxableevent”).185SeeMichael J.Graetz&IanShapiro,DeathbyaThousandCuts:TheFightOverTaxingInheritedWealth(2006).186Seediscussionatnote53andaccompanyingtext.


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2.AConsumptionTax

Whereas a tax base of income and wealth taxes individuals in accordancewith theirpower toconsume,aconsumptionbase taxes individuals inaccordancewith theiractualconsumption.187Aconsumptionbasecould increase, rather thanreduce, theharmsresultingfromeconomic inequalityundertherelativeeconomicpower framework.188 Taxpayers are encouraged to preserve economic power bysavingandinvestinginsteadofspending,therebyamplifyingdifferencesinrelativeeconomicpower.

It may be argued that a progressive consumption tax achieves the samepractical result of reducing disparities in spending power byminimizingwealthytaxpayers’purchasingpower.189Threeconsiderations,however,minimizetheeffectofaconsumptiontaxasatooltoreducedisparitiesinrelativeeconomicpowerbyreducing purchasing power. First, to the extent that consumption taxes are notsalient and taxpayers anchor economic ability by reference to pretax rather thanafter‐tax prices, a consumption taxwill not diminish the social effects of relativeeconomic power.190 Second, a consumption tax will only have the effect ofminimizingpurchasingpower if itcanconvincinglybe implemented inperpetuity.Otherwise, taxpayerswill benefit by saving anddeferring their consumptionuntiltaxratesarereducedinthefuture.

E.AdditionalObjectionstoTaxingWealth This Section addresses in greater detail two common objections to taxingwealth, on fairness and efficiency grounds.191 Under the first objection, a tax onwealth penalizes the choice to save, and thereby frustrates individual agency andliberty. Under the second objection, a tax on wealth harms the economy byinefficientlydiscouragingsavingsandcapitalformation.Thediscussionthatfollowsfirstquestions the conclusory formsof theseobjectionsand thenargues, counter‐intuitively,thatsettingboundsonthedegreeofeconomicinequalityresultingfrom

187Forargumentsfavoringaprogressiveconsumptiontax,seeDanielShaviro,ReplacingtheIncomeTaxwithaProgressiveConsumptionTax, 103TaxNotes91 (Apr. 5, 2004);RobertH. Frank,Whyhaveweddingsandhousesgottensoridiculouslyexpensive?Blameinequality,Vox,(Jan.16,2015),https://www.vox.com/2015/1/16/7545509/inequality‐waste.188SeeSchenk,note12,at456(onabilityofaconsumptiontaxtoincreasewealthdisparities).189That is, a consumption tax reduces purchasing power by reducing the amount of goods andservicesthatmaybeacquiredafterconsumptiontaxesarepaid.190SeeRajChetty,AdamLooney&KoryKroft,SalienceandTaxation:TheoryandEvidence,99Am.Econ.Rev.1145,1146(2009)(findingthatconsumersunderreacttotaxesthatarenotincludedinthepostedpriceofgoods).191Totheextentataxoncapitalincome,wealth,orthewealthannuityallburdensavings,thegeneralformoftheseobjectionswillapplytoallofthesebases,eveniftheeffectofthesavingsdisincentivewillvarywiththescopeofthebasedefinition.See,e.g.,Banks&Diamond,note7,at553(analyzingthe economic consequences of capital income taxation instead of wealth taxation because it isassumedthatannualmeasurementofwealthisnotavailable).


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individual choicesmade in themarket is in fact necessary to preserve individuallibertyandanefficientfreemarket.1.PenalizingChoice

Ataxoneconomicwell‐being,whetherfromincomeorwealth,distinguishesbetweentaxpayersonthebasisoftheirpersonalchoices—inparticularthechoiceswhether,andhow,topreserveandincreaseeconomicresources.Thelaborincometaxbase,forexample,disfavorsthechoicetowork,whereasthetaxbasesofwealthand capital income disfavor foregone consumption and successful investmentdecisions. Milton Friedman distilled the objection from a classical liberalismperspective to redistributing the outcomes from such personal choices with thefollowingexample:

Consideragroupofindividualswhoinitiallyhaveequalendowmentandwhoall agree voluntarily to enter a lottery with very unequal prizes. Theresultant inequalityof income issurelyrequiredof individuals tomakethemostoftheir initialequality. Redistributionaftertheeventisequivalenttodenyingthemtheopportunitytoenterthelottery.192

Thislotteryexampleillustratesthegeneralobjectioninabstractterms,butthesamelogicmay be extended to oppose redistribution of outcomes resulting from otherpersonaldecisions,suchasthechoiceswhethertoworkandtosave.193

Redistribution that completely obviates the role of choice is different,however, from moderate redistribution to reduce excessive inequality. Evenstridentadvocatesofpersonalchoiceandentitlementtheoriesofdistributivejusticegenerally accept aminimal degree of redistribution from the responsible and thelucky to the irresponsible and the unlucky. For example, whereas the logicalconclusionofFriedman’s lotteryexamplesuggeststhatan individualwhogamblesaway their last dime should face the consequences and perish, even Friedmancontemplates redistribution to alleviate poverty and a progressive exemption forminimal levels of income.194 A similar logicmay be extended to redistribution toalleviate extremes of inequality: Unequal outcomes may be accepted to rewardpersonalchoiceandevengoodfortunebutstilllimitedinthecaseswhereexcessiveinequalitybecomesharmfultosociety.195 The relative economic power theory suggests a more fundamental reasonwhy a constraint on the degree of economic inequality resulting fromFriedman’s192MiltonFriedman,CapitalismandFreedom:FortiethAnniversaryEdition162(2002).193See,e.g.,id.at174.194Seeid.at175,190‐95.195Alternatively, turningthequestionaroundwouldrequireanadvocateofachoiceorentitlementview to identify the degree of unequalmarket outcomes, if any, thatwould be considered undulyexcessive.


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lotteryisnecessarytopreservetheobjectiveofindividuallibertychampionedinhiswork. As described above, under the relative economic power theory excessiveeconomicinequalitysuppressesthepreferencesofthosewithlesseconomicpower.Ineffect,consecratingthechoicesofsomebypermittinglimitlessaccumulationsofeconomicpowerresultsinlimitingtheagencyandautonomyofothers.2.IncentivesandEfficiency

Any tax on economic outcomesmay be expected to discourage productiveeconomicactivity.196Ataxonlaborincomemaydiscouragelaboreffort,whereasatax onwealth or capital incomemay discourage the decisions to save and invest.From this perspective, under an optimal tax theory framework any benefits ofredistribution by taxing economic outcomes must be weighed against possibleefficiencycosts.197

Asaninitialpointofclarification,thepurposeofthisArticleisnottoevaluatetheefficiencyconsequencesoftaxingincomeorwealth,oraparticularcombinationthereof. Rather, this Article addresses the antecedent question of the basis forredistribution,orthecriterionofinequality,againstwhichefficiencycostsshouldbeweighed.198 From the perspective of the relative economic power theory, the

196SeeDanielShaviro,TheEconomicsofTaxLaw, inTheOxfordHandbookofLawandEconomicsVolume3:PublicLawandLegalInstitutions(FrancescoParisi,ed.,2017).197See,e.g.,Slemrod,note58,at3‐4(“Themodernapproachtoevaluatingprogressivityfocusesonthetradeoffbetweenthepotentialsocialbenefitofamoreequaldistribution . . .andtheeconomiccostscausedbythedisincentiveeffectsofthehighmarginaltaxratesrequiredbyaredistributingtaxsystem.”);JoelSlemrod,OptimalTaxationandOptimalTaxSystems,4J.Econ.Perspectives157,158(Winter1990).198Whetherthenormativedistributionalbaselineisafirst‐orderconsideration,tobeconstrainedbysecond‐orderefficiencyconsiderations,orviceversa,notionsoffairnessarecentraltotaxdesigninallevents.Scholarsdisagreeonusefulnessofapproachingquestionsoftaxdesignbyreferencetoanormativedistributionalbaseline,giventhefactthatdifferenttaxinstrumentsandchoicesforthetaxbase will have different efficiency consequences. Contra, e.g., Banks & Diamond, note 7, at 555(“‘[T]axable capacity’ always turns out to be very difficult to define and to be amatter onwhichopinionswilldifferratherwidely’.Weconcludethattheconsiderationofanidealtaxbaselendsitselfto too many concerns and conflicting answers to be viewed as a good starting point for theconsideration of taxation. An alternative start is by examining the economic equilibria that occurwithdifferent taxstructures.”),withJohnKay,Commentary, inMirrleesReview,supra,at656,663(“Myassessmentisthatthisputstheroleofequityandefficiencyinthechoiceofthemainhouseholdtaxbasethewrongwayround.Oneshouldbeginbyseekingameasureoftaxablecapacity,withthemeasurement of taxable capacity constrained by administrative and operational issues and byconsiderationsofefficiency.”).Ineffect,however,neitherviewsuggeststhatthenormativebaselinehasnorelevancefortaxdesign.Even ifdismissedasastartingpointagainstwhichefficiencycostsshouldbeweighed,theconceptofanormativedistributivebaselineisnecessarilyreintroducedintheoptimaltaxpolicyliteraturetoprecludeataxbasethatisefficientbutviolatesintuitionsoffairness.See, e.g., Banks and Diamond, supra, at 612. (“[S]ome aspects of horizontal equity may best beaddressedbyviewing themasa limitationonallowable tax tools. . . .Weaccept theview that taxtoolsshouldbelimitedbysuchconsiderationsandthatpoliciesshouldberestrictedtooneswhichareuniformovertheirstatedtaxbase.”).Forexample,BanksandDiamondrejectataxsystemthat


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relevant criterion is equality of economic spending power. Absent efficiencyconsiderations, this perspective suggests that all factors in economic spendingpowershouldbe taxedequivalently,whiledepartures fromthispresumptionmaybejustifiedbasedontheefficiencyconsequencesoftaxingspecificfactors. Stateddifferently, the distributional baseline of periodic economic spending powerdescribedinthisArticlemaybeincorporatedwithinanoptimalincometaxanalysisas implying a marginal social welfare weight placed on equality of economicspendingpowereachperiod.199

First,theefficiencycostoftaxingwealthislikelyoverstatedinallevents.Agrowing body ofwork in the optimal taxation literature argues thatwealth is anefficientadditionalbasefortaxation,aseitherasignalofearningability200orinlightofthedifferentplanningresponsestotaxesonincomeandwealth.201

Wealth taxationmay also be justified on efficiency grounds in light of thenegative externalities resulting from economic inequality, which can impede—ratherthanencourage—economicgrowth.202Studieshavefound,forexample,thatexcessiveeconomicinequalitycanresultininefficientpoliticalandmarketcaptureand underinvestment in human capital.203 Other works have suggested thatexcessivewealthconcentrationsdestabilize freemarkets initiallycharacterizedbymutually advantageous exchanges, as the benefits of market transactionsincreasingly accrue to thewealthy.204 In eachof these cases,wealth taxation that

differentiatesindividualsonthebasisofheight,evenifjustifiedinanoptimaltaxationframework,onthe grounds that doing so would be politically and publically unacceptable and, without furtherelaboration,onthegroundsthatsuchataxwouldviolate“ethicalunderpinningsoftaxation.”Id.at592.199Emmanuel Saez and Stefanie Stantcheva propose a general framework that can account for abroadrangeofethicalprinciplesanddistributionalbaselineswithintheoptimaltaxframework,bytranslating these principles intomarginal social welfare weights. See Emmanuel Saez & StefanieStantcheva,GeneralizedSocialMarginalWelfareWeightsforOptimalTaxTheory,106Am.Econ.Rev.24(2016).200SeeBanks&Diamond,note7,at563.201SeeGamage,note7,at431‐37.202See,e.g.,HeatherBoushey&CarterC.Price,HowAreEconomicInequalityandGrowthConnected?A Review of Recent Research 3 (2014), http://d3b0lhre2rgreb.cloudfront.net/ms‐content/uploads/sites/10/2014/10/100914‐ineq‐growth.pdf; Int’l Monetary Fund, Redistribution,Inequality, and Growth 5, 7‐9 (2014), http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf; Int’l Monetary Fund, Fiscal Policy and Long‐Term Growth 30‐31 (June 2015),https://www.imf.org/external/np/pp/eng/2015/042015.pdf; OECD, In It Together: Why LessInequality Benefits All 60‐80 (2015), http://www.oecd.org/social/in‐it‐together‐why‐less‐inequality‐benefits‐all‐9789264235120‐en.htm; Standard & Poor's Financial Services, HowIncreasingIncomeInequalityIsDampeningU.S.EconomicGrowth,andPossibleWaysToChangeTheTide (2014), https://www.globalcreditportal.com/ratingsdirect/renderArticle.do?articleId=1351366&SctArtId=255732&from=CM.203SeeOECD,note202,at60.204See generallyBruceM.Boghosian,AdrianDevitt‐Lee,Merek Johnson, Jie Li, JeremyA.Marcq&HongyanWang,OligarchyasaPhaseTransition:Theeffectofwealth‐attainedadvantageinaFokker‐Planck descriptionof asset exchange, 476PhysicaA: StatisticalMechanics and its Applications 15(2017) (describing the effects of a bias in favor of the wealthy in asset‐exchange models thatultimately leads to “wealth condensation” above a critical level of wealth inequality); Bruce M.


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reducesexcessiveeconomicdisparitiescaneliminatebarriers toeconomicgrowthandafunctioningfreemarket.205 V.Conclusion

Income andwealth taxation are premised on the same notion: Taxpayersshould be periodically compared, and taxed, on the basis of their economiccircumstances.ThisArticlefillsagapintheliteraturebyexaminingtherelationshipbetween income and wealth as measures of economic well‐being, and theconsequencesforprogressivetaxdesign.First,thisArticleformalizestheargumentfortaxingincomeandwealthasfactorsineconomicinequalitythroughtherelativeeconomic power theory. This theory, in turn, has specific implications for themeasurement of economic well‐being and inequality, and consequently for thedesignofaprogressivetaxbasethatoperatestoconstraininequality.Inparticular,the relative power theory implies that taxpayers should be compared by theirrelativeeconomicspendingpowerduringthetaxingperiod.

The Article proceeds to identify fundamental limitations in the taxation ofincomeandwealthasfactorsineconomicwell‐beingthroughseparateinstruments.Ifwealthshouldbetaxedinadditionalto labor income,neitherawealthtaxnoracapitalincometaxistheproperinstrument.Awealthtaxisablunttoolthattreatsall saversequally,whereasa taxoncapital income is an insufficientmeasure thatfailstofullyaccountforwealthasafactorineconomicwell‐being.Furthermore,thetaxation of both income and wealth through separate instruments cannotconsistentlycomparetaxpayers’relativeeconomicwell‐beingfrombothfactors.

The Article subsequently introduces a combined base of economic well‐being, as an alternative to either an incomeor awealth tax. The combinedbase,definedasthesumofthetaxpayer’swealthannuityvalueandlaborincomeduringthe taxing period, yields a more consistent basis for comparing individuals’economic well‐being from both income and wealth, and consequently forprogressivetaxation.Thismeasurealsoquantifieseconomicwell‐beingintermsofeconomic spending power during the taxing period and consequently tailors theprogressive taxbase to the theorizationof howeconomic inequality causes socialandpoliticalharm.

Boghosian, Adrian Devitt‐Lee &HongyanWang, The Growth of Oligarchy in a Yard‐SaleModel ofAsset Exchange: A Logistic Equation for Wealth Condensation,https://arxiv.org/pdf/1608.05851.pdf.205See the general statement of this consideration in Shaviro, note 196, at 6 (wealth taxation ispositivelycorrelatedwithnegativeexternalitiesresultingfromwealthinequality).

taxing income and wealth · 2019. 4. 11. · draft – october 27, 2017– please do not cite or...

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