If you want to impose a tax on income, you need to delineate the contours of the concept of income. Importantly, you need to mark the line between income-producing activities and non-income-producing (or personal) ones. When an individual or a business engages in costly activities that produce taxable income, the cost of those activities should be deductible. When that individual or business engages in costly activities that do not produce taxable income, the cost should not be deductible for tax purposes. Sounds simple.
Some legal concepts (like the distinction between business and personal expenses) are misleadingly simple to articulate and are confounding in their application, while some expenses cause tax scholars and policy-makers relatively little anxiety. As Fellows and Kahng illustrate, if I pay to go on a vacation, drink a fine bottle of wine, or fall asleep on a high-end mattress, no one would suggest that my expenses should be tax deductible. They are clearly personal.
But for scholars with an interest in equality, questions about some of the more ambiguous expenses remain. What about when a person living in poverty pays to attend university with the objective of obtaining a more lucrative work position? Or what about the person with a disability who has to pay for expensive equipment to return to the workplace? Or what about the woman who has to pay for childcare so that she can return to work after having a child? These expenses are often not considered to be expenses incurred to produce income for employees, and their deduction is routinely denied.
Many tax scholars have engaged in debates about the business/personal distinction over the years. (And despite the richness of that literature, there is still a good deal to say.) Fellows and Kahng don’t stop their analysis, though, by taking on only the business/personal distinction. Instead, they center their analysis on the ways in which that distinction is differently operationalized when they taxpayer in issue is a worker rather than a business. Central to their claim is the evidence that when legislators, policy-makers, and courts adjudicate the line between personal and business expenses for workers, they are highly restrictive: if there is an argument that the expense is personal, it is denied. In contrast, when those same people or bodies adjudicate the line between personal and business expenses for businesses, they are highly liberal: if there is an argument that the expense is business, it is allowed.
To make that distinction more concrete, as noted above, many of the expenses workers incur that facilitate participation on the paid workforce (for example, education, medical expenses, or child care) are not deductible. On the other hand, many of the expenses incurred by a business’s managerial class (for example (borrowing from Fellows and Kahng), costly furniture, artwork, luxurious travel accommodations and meals) are regularly deductible. As the authors state, “[i]t is unclear, for example, why a corporate executive must have a mahogany desk or a corporate jet to fly him to business meetings when a Steelcase desk and commercial air travel are available at a fraction of the cost” (at 36).
Fellows and Kahng’s argument unfolds in five parts. Part I roots the distinction between business and personal expenses and the different alignment of that distinction for workers and businesses in the politics surrounding the enactment of the income tax legislation in 1913 and the immediately following years. This part of their work provides a wonderful political economy of the entrenchment of attitudes about workers and businesses in income tax law in its early periods. Part II focuses on the development of the deference decision-makers (and especially courts) give to businesses in allowing expenses to be deductible. Part III centers on workers – exploring the ways in which the deduction workers expenses, even those with significant attachment to income-production, are routinely denied. The authors describe the current approach as resulting in underinvestment in worker productivity, and misallocation of resources and misevaluation of assets; therefore, Part IV lays out an argument in favor of the more liberal deduction of expenses incurred by workers (and more restrictive deduction of expenses incurred by businesses) based on the economic incentives those tax changes would create. Finally, Part V sets three goals for redefining the tax base.
Fellows and Kahng’s piece is not for the faint of heart: it is dense, thickly argued, and ultimately, about tax law. Yet the issue at the centre of their work, the conceptualization of our human action as fundamentally connected to income production or as a non-work-based-personal activity, is an important conceptual issue for equality scholars. As the U.S. election debates have underscored, the design of our tax system reveals a good deal about what we value and who we value. For those who care about what the tax system exposes about what we think is private, this article (and the conceptual problems it addresses) is essential reading.