Schedularity in U.S. Income Taxation and its Effect on Tax Distribution

21 Pages Posted: 21 Jul 2014 Last revised: 22 Jun 2018

See all articles by Henry Ordower

Henry Ordower

Saint Louis University - School of Law

Date Written: July 20, 2014

Abstract

Income tax systems in some countries follow primarily schedular models that classify income by type, match it with deductions from the same class, and compute a separate tax on each class. The United States income tax uses a global tax model under which it taxes citizens and permanent residents on their worldwide income without regard to source or character. The United States system is not purely global but includes schedular elements. This Article exposes embedded schedularity in the United States income tax in the three principal areas of investment income, personal services income, and tax free income. The Article tests whether that schedularity enhances or undercuts the tax principles of horizontal and vertical equity that underlie the development of both global and schedular tax systems in advanced economies. Horizontal equity is a straightforward principle and seems an indisputable precept. It requires that like taxpayers incur like tax burdens. The principle of vertical equity is more nuanced and departs from the principle that as one’s income increases, one can and should contribute ever larger percentages of that income to supporting governmental services. Vertical equity assumes that the wealthier one is, the less likely it is that an increased tax burden will diminish the individual’s welfare in any material way. Conversely, the less wealthy one is, the more likely it is that an increased tax burden will diminish the individual’s welfare materially. The vertical equity principle led to the development of the progressive rate structures. While the Article observes that Congress uses schedular elements to accomplish distributional policy goals, initially in order to protect progressivity, more recently schedularity has tended to increase overall regressivity in taxation. The Article concludes that United States taxation seems to be moderately schedular and that schedularity in the United States contributes to regressivity in taxation.

Keywords: Income Taxation, Regressivity, Schedularity, Distribution, Fairness

JEL Classification: D60, K34, H21, H22, H23, H24

Suggested Citation

Ordower, Henry, Schedularity in U.S. Income Taxation and its Effect on Tax Distribution (July 20, 2014). Northwestern University Law Review, Vol. 108, No. 3, 2014, p. 905-24; Saint Louis U. Legal Studies Research Paper No. 2014-19. Available at SSRN: https://ssrn.com/abstract=2468787

Henry Ordower (Contact Author)

Saint Louis University - School of Law ( email )

100 N. Tucker Blvd.
St. Louis, MO 63101
United States

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