80 Pages Posted: 19 Oct 2009 Last revised: 25 May 2011
Date Written: October 19, 2009
The dominant view in tax law and policy is that achieving the optimal balance of revenue, efficiency, and equity generally requires basing taxes and transfers solely on income from labor and not also on other potentially taxable attributes such as income from capital. The optimality of labor-earnings-only taxation is regarded as “the plain vanilla case” or the “natural model.” Circumstances in which a more eclectic tax base is warranted are described as “exotic” or as “theoretical curiosities.”
The primary objective of this article is to invert this conception of what is typical and what is peculiar. The goal is to convince the reader that - at least with regard to revenue, efficiency, and equity - tax eclecticism is the rule, and labor-earnings-only taxation, the exotic exception.
The second objective of the paper concerns the administrability of the tax and transfer system, inclusive of its simplicity. The article shows that the revenue-efficiency-equity benefits of adding a new attribute to the base will accrue to the very simplest modes of inclusion. Eclecticism does not necessitate exoticism; nor does it preclude a fair measure of minimalism.
A companion paper critiques the tax substitution argument for taxing only labor income (Sanchirico, Chris William, A Critical Look at the Economic Argument for Taxing Only Labor Income (March 4, 2009). Tax Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 09-08. Available at SSRN: http://ssrn.com/abstract=1353322)
Keywords: Tax policy, equity and efficiency, optimal taxation, tax substitution argument, consumption tax versus income tax, Atkinson and Stiglitz, taxes versus legal rules
JEL Classification: K34, D30, D31, D60, D61, D63, H00, H20, H21, J38, K00, K10
Suggested Citation: Suggested Citation