UCLA Law Review Volume 52, Issue 6
The earned income tax credit (EITC) is a transfer program aimed primarily at low income working parents, administered by the Internal Revenue Service (IRS) as part of the federal income tax. Although generally tax-like in its administration, in substance it resembles nontax antipoverty transfer programs, such as Food Stamps and Temporary Assistance for Needy Families (TANF). In recent years, Congress has become concerned about EITC overpayments, and the IRS has responded by emphasizing EITC compliance more heavily than compliance with other aspects of the income tax – an emphasis that has been strongly criticized by advocates for the working poor. This Article compares the vigor of EITC enforcement with the vigor of overall federal tax enforcement and also with the vigor of welfare (Food Stamps and TANF) enforcement, along a number of dimensions. It concludes that the level of EITC enforcement lies between the low level of the rest of the income tax and the high level of nontax transfer programs, but that it lies considerably closer to the income tax end of the enforcement spectrum. Most significantly, the administration of the EITC resembles that of the rest of the income tax, and differs from that of other transfer programs, in that it is generally based on self-declared eligibility rather than on a bureaucratic determination of eligibility prior to the making of payments. The Article considers possible explanations for the differing enforcement practices, suggesting that the greater tolerance for tax underpayments than for welfare overpayments may be attributable to the phenomenon of “everyday libertarianism.” It also suggests that the treatment of the EITC as more tax-like than welfare-like is due to “protective coloration” derived from its placement within the Internal Revenue Code, a placement that is an accident of history. Finally, it argues that the historical accident is a happy one, as tax-based administration of the EITC, on balance, produces superior results to those that would be produced by welfare-based administration.
At the turn of the twentieth century, the U.S. system of public finance underwent a dramatic, structural transformation. The late nineteenth-century system of indirect taxes, associated mainly with the tariff, was eclipsed in the early decades of the twentieth century by a progressive income tax. This shift in U.S. tax policy marked the emergence of a new fiscal polity – one that was guided not simply by the functional and structural need for government revenue but by concerns for equity and economic and social justice. This Article explores the paradigm shift in legal and economic theories that undergirded this dramatic shift in U.S. tax policy. More specifically, this Article contends that a particular group of academic economists played a pivotal role in supplanting the “benefits theory” of taxation, and its concomitant vision of the state as a passive protector of private property, with a more equitable principle of taxation based on one’s “ability to pay” – a principle that promoted a more active role for the state in the distribution of fiscal burdens. In facilitating this structural transformation, these theorists were able to use the growing concentration of wealth and the ascendancy of new economic ideas as justifications for using a progressive income tax to reallocate the burdens of financing the burgeoning American regulatory, administrative, and welfare state.
Welfare economics suggests that the tax system is the appropriate place to effect redistribution from those with more command over material resources to those with less: in short, to serve “equity.” Society should set other mechanisms of private and public law, including public finance systems, to maximize welfare: in short, to serve “efficiency.” The populace, however, may not always accept first-best policies. Perspectives from cognitive psychology suggest that ordinary citizens react to the purely formal means by which social policies are implemented, and thus may reject welfare-improving reforms. This Article sets out the general background of the problem. We present the results of original experiments that confirm that the means of implementing redistribution affect its acceptability. Effects range from such seemingly trivial matters as whether tax burdens are discussed in dollars or in percentage terms, to more substantial matters such as how many different individual taxes there are, whether the burden of taxes is transparent, and the nature and level of the public provision of goods and services. The findings suggest a deep and problematic tension between the goals of equity and efficiency in public finance.
In this Article Professor Kornhauser proposes an Integrity Principle that Congress should use when legislating in the face of inevitable disagreement and conflict among principles. This Principle, loosely based on Ronald Dworkin’s principle of integrity, requires Congress to promote coherence from both a practical and theoretical perspective. The practical aspect insists that Congress enact laws that best comport with reality; the theoretical aspect demands that Congress first interpret conflicting principles in a manner that best reconciles them and then enact laws that maximize this harmonization. Professor Kornhauser then applies the Integrity Principle to the question of a tax rate structure, a situation in which fundamental American principles of equality and liberty collide. The practical prong of the Integrity Principle undercuts the assumption that a progressive rate structure is redistributive. This is a crucial assumption because the strongest objections to progressivity are based not on economics but on claims of justice. Thus, to the extent that progressivity is not redistributive, conflicts between equality and liberty disappear. The theoretical prong of the Integrity Principle demonstrates that even if a progressive tax rate were redistributive, progressivity best reconciles two fundamental, but often conflicting, sets of principles: fairness and justice, and equality and liberty. The Integrity Principle, and its concomitant choice of progressivity, will increase the agreement between state action and individual belief and thereby enhance the legitimacy of the state. Since progressivity is a “better fit” with American principles, it boosts legal, moral, and popular support of the state; helps restrain concentrations of wealth and power – an historic threat to the legitimacy in America, and encourages national (or even international) unity.
Inequality has increased in recent years in both developed and developing countries. Tax experts, like others, have focused on how taxes may reduce this growing inequality of income and wealth. In developed countries, the income tax, and especially the personal income tax, has long been viewed as the primary instrument for redistributing income. This Article examines whether it makes sense for developing countries to rely on personal income taxes to redistribute income. We think not, for three reasons. First, the personal income tax has done little, if anything, to reduce inequality in many developing countries. Second, it is not costless to pretend to have a progressive personal income tax system. Third, opportunity costs also exist from relying on taxes for redistributive purposes. If countries want to use the fiscal system to reduce poverty or inequality, therefore, they need to look elsewhere. This Article begins with some initial reflections on the redistributive role of the tax system. It then considers the relative success of developed and developing countries in using tax systems to redistribute income. Finally, the Article examines some alternatives in reforming the personal income tax, as well as options available to developing countries in designing and implementing more progressive fiscal systems.