It’s nice, I guess, to be credited as the founder or initiator of a literature that has burgeoned in the law reviews over the last ten or twelve years. Hence, I enjoyed noting a newly published article by Ilan Benshalom and Kendra Stead, entitled “Values and (Market) Valuations: A Critique of the Endowment Tax Consensus,” which begins as follows:
“A consensus is hard to come by, and to the extent you find one you should be suspicious of it. There are hints of such a consensus among several prominent tax scholars—endorsement of endowment as the ideal tax base. An endowment tax would be based on individuals’ ability to earn income rather than on income actually earned. This Article challenges this agenda at a crucial moment, as developments in genetics and quantitative social sciences may start allowing endowment taxation to creep outside the boundaries of abstract tax theory, potentially affecting real tax policy arrangements.
“Many leading tax scholars writing today have endorsed the endowment tax—that is, the tax of material wealth and innate earning capacity one is born into—as a tax base superior to consumption or income. Daniel Shaviro was the first tax law scholar to articulate the potential importance of the endowment tax, noting that endowment could serve as a proxy for well-being. Viewed as an indicator of well-being, endowment appears to be an equitable tax base under certain liberal egalitarian approaches. The main appeal of the endowment tax, however, is that its progressivity does not seem to have very high efficiency costs. If endowment is innate, individuals cannot change their behaviors to avoid the tax and will therefore have the incentive to allocate their time and wealth resources in the most efficient way. Given the undeniable force behind this reasoning, the notion of endowment as an ideal tax base has won many supporters.”
Benshalom and Stead then criticize the idea and several of its prominent recent proponents, making what they recognize is a more old-fashioned case for wanting to base taxes on actual earnings or income, rather than on some gauge of mere potential.
My original article on endowment taxation attempts to make one point clear that has frequently been forgotten in the debate (which itself sometimes strikes me as having too much of an angels-on-the-head-of-a-pin character).
“Inequality … plays an important role in a variety of views of distributive justice, although under any it rests at least one turtle from the bottom. [Footnote citing the old story of the woman who claimed that the earth rests on the back of a turtle and, when asked what the turtle rests on, responded that it was “turtles all the way down.”] The move from a description of who is better-off under some metric to the claim that tax burdens should vary by reason of the differences that this metric identifies requires motivation.”
I argue that, under plausible assumptions, endowment or earnings ability is one turtle down from actually observed income or market consumption as a marker of material wellbeing. For example, if we think of utility as produced by market consumption plus leisure, someone who voluntarily chooses more leisure isn’t, by reason of the choice, worse-off than someone who happens to prefer choosing more work and market consumption.
But endowment differences, even if deemed both meaningful and measurable, don’t get you all the way to relative wellbeing, and they certainly don’t get you all the way to relative marginal utility of a dollar given people’s circumstances, which is the key distributional factor in a utilitarian social welfare function.
So we’ll always remain a few turtles from the bottom (to put it optimistically), no matter how far down we go. And endowment can’t be a first-best tax and transfer base, any more than income or consumption, even if in some respects it’s superior. (Not in all respects, however – for example, it can’t address the role of an income or consumption tax in addressing the risks associated with under-diversified human capital, e.g., because one may have to specialize in a particular profession that faces variable future returns.)
First-bests are generally unavailable theoretically, not just practically.