Tax Law, Religion, and Justice

An Exploration of Theological Reflections on Taxation

Allen Calhoun

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000356571
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

This book asks why tax policy is both attracted to and repelled by the idea of justice.

Accepting the invitation of economist Henry Simons to acknowledge that tax justice is a theological concept, the work explores theological doctrines of taxation to answer the presenting question. The overall message of the book is that taxation is an instrument of justice, but only when taxes take into account multiple goods in society: the requirements of the government, the property rights of society's members, and the material needs of the poor. It is argued that this answer to the presenting question is a theological and ethical answer in that it derives from the insistence of Christian thinkers that tax policy take into account material human need ( necessitas ). Without the necessitas component of the tax balance, tax systems end up honoring only one of the three components of the tax equation and cease to reflect a coherent idea of justice.

The book will be of interest to academics and researchers working in the areas of tax law, economics, theology, and history.

1 Equity and efficiency

Introduction

In June 2019, a call for a US federal wealth tax was published under the title “An Open Letter to the 2020 Presidential Candidates: It’s Time to Tax Us More.” It was written by 20 very wealthy Americans. “A wealth tax,” the letter argued, “would help close the large gap in effective tax rates between very rich families and everyone else.” The current economic imbalance that the billionaire authors sought to redress “creates resentment and makes it harder for working-class Americans to achieve social mobility. … The most fortunate should contribute more.” The signatories concluded: “It is not in our interest to advocate for this tax, if our interests are quite narrowly understood. But the wealth tax is in our interest as Americans.”¹

The letter is mentioned here not for the merits of its proposal, but to draw attention to the fact that its authors felt the need to write it in the first place. The idea that taxes on the wealthy are, at best, a necessary evil is so ingrained in American tax policy and in the popular imagination that these wealthy Americans felt obliged to implore presidential candidates to consider taxing them in new ways for the benefit of society. Twenty billionaires speaking against their own immediate economic interests was seemingly required to break through the single guiding principle of American tax policy, i.e., that taxes must not impede the preservation and maximization of wealth any more than is necessary.

Tax policy in the United States is a puzzle: its domain is “thoroughly moralized territory” but it lacks an abstract moral principle to structure it. Tax justice, consequently, is approached in a piecemeal manner, both in theory and in policy. On the one hand, tax theorists and policymakers refer frequently to concepts such as inequality but have no consistent conception of justice to guide them.²

This puzzle manifests itself in the way taxation works in society. On the one hand, the full weight of distributive justice falls on the tax system, thus freeing other areas of law to focus on maximizing economic growth. The tax scholar Linda Sugin writes:

For better or for worse, the tax law is the major tool of redistribution we have. Tax policy debate is one of very few areas of the law in which discussions of distributive justice are considered appropriate. The political reality is that most other economic regulation is oriented towards maximization of wealth, rather than its distribution. The tax law comes in after productivity is maximized, and it should—to some extent at least—rearrange the results produced by markets that operate to concentrate wealth and opportunity.³

On the other hand, tax theorists often push equity considerations aside. Taxation tends to be regarded as a “black box” that is called on “to put into effect whatever distribution of economic benefits and burdens … is required by the normative theory under discussion.”⁴ The degree of concern over inequality in society is a “normative” question “that cannot be answered with data” and must, therefore, be segregated from economic considerations.⁵ A barrier is required, it seems, between “uncontroversial” considerations such as “productivity, efficiency, and real income” and “controversial,” distributional concerns.⁶

This barrier leaves taxation in an untenable position; it is the best—perhaps only—instrument of distributive and redistributive justice available, but distributive concerns are not regarded as appropriate subject matter for tax theory. Why, Sugin asks, would we want to “discount the one real-world tool that is regularly employed toward achieving” distributive justice?⁷

(Re)distributive taxation

A tax is an enforceable “financial charge” that the state makes on an individual, corporation, or other entity “for the support of state operations and programs.” The revenue from taxation is generally considered “just” if it is used for one or more of three purposes: (1) paying for government and public services; (2) shaping the behavior of citizens; and (3) redistributing resources.⁸ The first purpose—paying for public, “non-rival” goods—is the least morally controversial, although even that use of taxation lacks a moral account of “which public goods warrant coercive supply.”⁹ The second use—taxation for the purpose of altering the way people use resources—is more controversial. It is not the focus of this book, although it appears when necessary.

The focus of this book is on the third purpose of taxation, its redistributive function. Taxation is, as we have already seen, “the most important instrument by which the political system puts into practice a conception of economic or distributive justice.”¹⁰ Justice is the subject matter of economics to the extent that economics “is concerned with the proper distribution of scarce resources in society,”¹¹ and no aspect of economics or politics affects that distribution more than redistributive taxation.¹²

The two criteria by which the majority of economists today measure the outcomes of tax policy are efficiency and equity.¹³ Efficiency is understood here to mean “non-distortional,” i.e., as causing minimal interference in the decisions that taxpayers make.¹⁴ In tax scholar James Repetti’s words, “[t]he ‘efficiency’ of a tax system frequently refers to its ‘excess burden,’ which reflects the decrease in utility attributable to behavioral changes that would not occur in a tax-less world.”¹⁵

Equity is regarded as the element of justice in the sphere of taxation, but it is difficult to define. On one level, tax equity refers to “how taxes should be distributed among the public.”¹⁶ Tax equity is typically thought of in terms of “horizontal equity” and “vertical equity,” but these two concepts do not offer the same definition of equity. Horizontal equity refers to the idea that equal incomes should bear the same tax burden, vertical equity to the idea that the burden of taxation should increase as income increases.¹⁷ These two conceptions of equity sometimes conflict.¹⁸

Even when standing alone, moreover, neither conception of equity carries a stable and uncontestable meaning. The exact shape of an equitable curve in a progressive tax system (i.e., one in which rates increase as income increases) has proved elusive. Vertical equity is a principle that simply cannot be reduced to an actual rate structure.¹⁹ Horizontal equity fares a little better. The 2017 federal Tax Act, for instance, adopted a “schedular” system “that applies different tax rates, or schedules, to different types of income” in an effort to “avoid the distortions and economic inefficiencies given the practical inability to include all income in the tax base.”²⁰ These moves “effectively upended the key principle of the Tax Reform Act of 1986, namely that an ideal revenue system should tax a broad base of income at low rates.”²¹ These two tax reform acts present two different conceptions of horizontal equity. The 1986 Act operated with the assumption that taxpayers with similar amounts of income should be taxed at approximately the same rate; the 2017 Act took into account the varying effects of different types of income in attempting to achieve approximate equality of treatment across the tax base.

At another level, tax equity refers to redistributive justice, i.e., the change of resources across society rather than merely the allocation of the tax burden.²² The line between distributive justice and redistributive justice is blurred, however. The two terms—distributive and redistributive—are not used consistently. “Distributive justice” sometimes means something broader, and vaguer, than the fair allocation of tax burdens.²³ Even assuming consistent definitions, the distinction between the two types of justice is not always clear. Vertical equity is a case in point. It is a kind of distributive justice, because it seeks to allocate more of the overall tax burden to the relatively wealthy than to the less wealthy. However, under utilitarian assumptions, a progressive rate structure is only distributive—and not redistributive—if that structure reflects the exact rate at which the marginal utility of income declines. A taxpayer with greater pre-tax income pays a higher dollar tax than a person with less pre-tax income, but tax burdens measured in utility are the same. No redistribution of income occurs.²⁴ That, however, is an unlikely scenario. Distributive justice often evolves into redistributive justice without any intention or even awareness on the part of policymakers: “When governments try to rectify some real or perceived vertical inequity, some amount of redistribution is almost inevitable.”²⁵

The ambiguous meaning of tax equity has undoubtedly hampered efforts to balance efficiency and equity.²⁶ Nevertheless, ...