INTRODUCTION I. AN INITIAL CONCERN: DIRECT AND INDIRECT OBSERVATION OF ABILITY II. UTILITARIAN CONSIDERATIONS A. The Standard Economic Argument: Elimination of Substitution Effects B. Endowment Taxation as Ideal Haig-Simons Income Tax III. NON-UTILITARIAN CONSIDERATIONS A. Fairness Arguments for Endowment Taxation 1. The Naive Argument from Fairness: Tax Equity for Physical and Human Capital a. Reply: The Boundaries Between Property and Self, and the Social Meanings of Endowment Taxation 2. Income Tax as Aggravator of Welfare Inequalities 3. Income Taxation as Discrimination Between Mere Commodity Preferences 4. Endowment Tax as Embodiment of Luck Egalitarian Principles B. Rawls's Rejoinder: The Priority of Liberty C. Stark's Libertarian Challenge D. Meeting the Challenge: Differences in Pattern of Infringement? E. Meeting the Challenge: Differences in Aggregate Infringement? IV. ENDOWMENT TAXATION WITHOUT TALENT SLAVERY? A. Dworkin's Auction and Insurance Scheme B. Markovits's Market Analysis C. Challenging the Reconciliation 1. The External Challenge a. Intra-World Pathology: Redistribution from the Disabled to the Abled b. Inter-World Pathology: Less Stringent Obligations for Wealthy Societies 2. The Internal Challenge V. CONCLUSION INTRODUCTION
[F]rom each according to his ability, to each according to his needs!
--Karl Marx (1)
From each according to his ability, to each so as to maximize total utility, or a weighted social welfare function thereof.
--Paraphrase of the Theory of Optimal Taxation (2)
What is endowment taxation? Whereas an income tax levies on a person's actual earnings, an endowment (or ability) tax taxes a person's potential earnings, which can be thought of as the maximum income a person could or could have earned over a given time period. Under this regime, the tax base therefore consists of an individual's genetic and socioeconomic endowment, as these factors are (at least believed to be) determinative of overall earning potential. To be sure, the endowment tax has struck some--and may, at least at first glance, strike the reader--as offensive, due to its apparently blithe commoditization of the taxpayer's personal attributes. Nevertheless, in recent years, a sizeable cohort of legal scholars, economists, and political theorists have rallied in defense of the endowment tax as a theoretical ideal, offering formidable economic and philosophical arguments in its favor. These scholars have generally upheld endowment as a "first-best" choice of tax base, superior to the traditional candidates of income, consumption, and wealth.
This Article makes two primary contributions. First, it presents an in-depth survey of the recent legal academic literature on endowment taxation and evaluates the most important arguments for and against this regime. Second, this Article argues that the (seemingly) most elegant theoretical justification for the endowment tax is not ultimately successful at resolving a core tension within the proposal; thus the soundness of the regime's theoretical basis is far from settled.
The Article proceeds as follows. After briefly addressing a preliminary concern about my project's practicality in Part I, I then in Part II consider two arguments in favor of endowment taxation that rely upon a utilitarian framework of analysis. According to the "standard economic argument," ability taxation is claimed to be economically efficient since it produces no substitution effects or accompanying deadweight losses (Part II.A). In addition, because an endowment taxation may function as an ideal Haig-Simons income tax, it may minimize distortions in investment decisions in human and physical capital, thereby leading to an increase in aggregate wealth and wellbeing (Part II.B).
Other arguments for the endowment tax, considered in Part III.A, draw upon non-utilitarian considerations, such as fair tax treatment for physical and human capital (Part III.A.1), the elimination of certain interpersonal differences in welfare (Part III.A.2), and state neutrality between preferences for leisure versus consumption (Part III.A.3). However, arguably the most fundamental pro-endowment tax argument is rooted in the normative theory of luck egalitarianism, which holds that distributive justice requires the elimination of inequalities that are due to factors beyond an individual's control, but permits for inequalities that arise from individuals' autonomous choices (Part III.A.4).
The most influential objection to endowment taxation draws attention to the tax's potential to infringe upon individual liberty: because an endowment tax may force an individual to adopt a high paying job that she dislikes solely in order to satisfy her tax obligations, it may deprive the person of freedom of occupation and make her a "slave to her talents." I turn to this criticism in Part III.B. Some commentators have challenged the import of this objection on the grounds that an income tax may also force a person to engage in more or different work in order to satisfy her tax obligations (Part III.C). Thus, no in-kind distinction can be drawn between endowment and income taxation. However, critics of the endowment tax may respond that endowment taxation results in an objectionably different pattern of liberty infringements relative to an income tax (Part III.D), as well as to greater overall quantities of liberty costs (Part III.E). The viability of these strategies are considered in turn.
This dialectic comes to a head in Part IV. After providing the relevant theoretical background in Part IV.A, I take a closer look in Part IV.B at the most sophisticated attempt at reconciling endowment taxation's luck egalitarian motivation with a concurrent concern for individual liberty. The argument to be examined relies upon Ronald Dworkin's formulation of luck egalitarianism, which Dworkin refers to as "equality of resources." This argument seeks to show that, while the participants to Dworkin's version of the original position might opt for a tax regime where individual rates are based upon potential income, they would never set rates so high as to lead to talent slavery. This argument is important for at least two reasons.
First, Dworkin's theory, which has been very influential in political philosophy, has also been the subject of increasing attention from tax academics.3 Among liberal egalitarians, Dworkin's approach to distributive justice may be gaining ground vis-a-vis Rawlsianism because the former takes more seriously the distinction between the effects of chance versus choice, and thereby provides a greater role for individual responsibility than the latter. (4) In addition (as to be seen below) Dworkin's formulation of the original position is substantially more detailed than Rawls's thought experiment, and therefore admits to a finer grained decision-theoretic analysis. (Indeed, it has been suggested that because Rawls's original position is a strategic choice under ignorance, rather than under risk, it does not admit to a unique solution.) (5)
Second, if successful, the argument considered in Part IV.B would show that the avoidance of talent slavery serves as an internally motivated constraint on the design of an endowment tax, which flows naturally from Dworkin's formulation of luck egalitarianism. This would neatly resolve the conflicts discussed in Part III, and thereby establish that the luck egalitarian motivation for endowment taxation and a proper respect for individual liberty are in merely prima facie tension with each other; when all is said and done, the two could be set in harmony.
However, as its second primary contribution, this Article argues that this attempted resolution does not succeed. In Part IV.C, I provide both external and internal challenges to the argument considered in Part IV.B. The external challenge will illustrate that Dworkin's thought experiment generates certain pathological results, which should cause us to lose faith in the device as a reliable barometer of distributive justice. The internal challenge, which for the sake of argument accepts Dworkin's theory as an appropriate normative framework for matters of distributive justice, observes that the argument considered in Part IV.B implicitly turns upon certain dubious empirical assumptions, and thereby fails to establish that Dworkin's set-up would rule out talent-slavery-producing tax rates under all plausible empirical circumstances. Thus, the conflicts between equity and liberty discussed in Part III resurface in the context of a slightly more complex dialectic. It turns out that the luck egalitarian motivation for endowment taxation and deference to individual liberty cannot be wholly reconciled.
In the conclusion, I provide a brief overview of the Article's main lessons and point to directions for future work.
AN INITIAL CONCERN: DIRECT AND INDIRECT OBSERVATION OF ABILITY
Before diving headlong into the murky depths of theory, let us first take a step back and consider a preliminary concern about our project's practicality. As a person's earning ability cannot be directly observed, it may seem frivolous to consider whether earning ability would constitute a sensible tax base. The thought here is that, because we do not inhabit a reality where endowment is readily transparent, one's time in the armchair is better spent devoted to more pressing topics.
This conclusion would be too hasty, however, since a person's socioeconomic and genetic endowment may be susceptible to indirect observation through the use of statistically reliable proxies and indicator goods. (6) Admittedly, it is probably unrealistic to suppose that these stand-ins could ever provide a particularly precise appraisal of ability. (7) But one way of working around such epistemic limitations might be to employ statistical correlates to create a rebuttable presumption of earning capacity, which could then be overcome by credible countervailing evidence....