Values and (Market) Valuations: A Critique of the Endowment Tax Consensus

48 Pages Posted: 23 Dec 2012

Date Written: December 1, 2010


Should we tax a talented, yet idle, computer engineer on her relatively low income or her relatively high earning capacity? In the last decade, an overwhelming consensus has developed among leading tax scholars that taxing individual capacity, or endowment, would offer a more equitable and efficient alternative to the income tax. Earning capacity, however, has always been perceived as unobservable. As a result, the tax scholarship promoting the endowment tax never squarely confronted the challenges that such a tax would pose to our political reality and moral intuitions. Recently, however, three of the country’s leading public finance and tax law scholars showed in two independent articles that certain aspects of earning capacity are indeed observable through the analysis of genetics and empirical social science research. These articles force tax theory to a fork in the road - either find ways to transition the endowment tax consensus into actual tax arrangements or explain why it is not an ideal tax base.

This Article argues the consensus is wrong because it assigns the market price an inappropriate normative weight. Market prices represent the aggregated preferences of society as reflected through a set of voluntary transactions. Embracing the market price to assess earning capacity for tax-transfer purposes in a non-voluntary coercive setting is therefore analytically flawed. With respect to earning capacity, the price signal only gains credibility as a measurement of well-being when an individual voluntarily agrees to accept it. The Article further demonstrates that the endowment tax promotes an ex ante form of redistribution, which may be insufficient to accommodate liberal and democratic concerns over redistribution. The impact of these conclusions reaches beyond the tax debate. The endowment tax agenda and its popularity represent symptoms of the expanding role played by efficiency considerations within legal discourse. Therefore, challenging the endowment tax contributes to a broader debate about the role of efficiency considerations within the existing political framework.

Suggested Citation

Benshalom, Ilan and Stead, Kendra, Values and (Market) Valuations: A Critique of the Endowment Tax Consensus (December 1, 2010). Northwestern University Law Review, Vol. 104, No. 4, 2010, Available at SSRN:

Ilan Benshalom (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905

Kendra Stead

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

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