Monday, January 5, 2009

The Tax Canon -- Blum & Kalven '52

The first stop in my trip through Vic Fleischer's Tax Canon is Walter J. Blum & Harry Kalven Jr., The Uneasy Case for Progressive Taxation, 19 U. Chi. L. Rev. 417 (1952) (I downloaded it from JSTOR as it seems neither Lexis nor Westlaw go back to 1952). Blum and Kalven were both University of Chicago law professors who were among the "towering figures who redefined and reconstituted the University of Chicago Law School after World War II" Blum (unrelated to the superstar jockey of the 1960s of the same name -- thank you wikipedia) seems to have been one of THE tax scholars of his day whereas Kalven was one of THE all-around legal scholars of his day, authoring works on torts and first amendment issues as well as tax policy. (Apparently, Kalven wrote half of the materials available on Amazon.)

So what do these guys have to say about The Uneasy Case for Progressive Taxation? A whole lot, and the case that they make is indeed uneasy at best. The article begins by defining a progressive tax as " whose rate increases as the income of the taxpayer increases; under it a taxpayer with ten times the total income of another would pay something more than ten times as much tax." and then stating that the purpose of their essay is to answer the question, "On what grounds is a progressive tax on income to be preferred to a proportionate tax on income?" Beginning with the notion that it just makes intuitive sense to most of us that those who are rich should pay more in taxes (as a proportion of their income) than should the poor, they move through a number of frameworks with which to analyze the validity of our collective hunch that a progressive tax is just and desirable.

Under the (quite believable) assumption of diminishing marginal utility, Blum and Kalven discuss at length the various ways in which we might seek to tax individuals according to the utility that they would be forced to give up and/or their ability and relative willingness to pay the taxes needed by the state. What is truly fascinating is that no matter what economic logic is applied to the case of progressive taxation, the best that the authors are able to show is that a progressive tax is not worse than a proportional tax. I was expecting a mathematical proof that a progressive tax should be strictly preferred to a proportional tax, but apparently there is not one available -- and certainly not for lack of trying as the authors frame the progressive tax in a number of clever ways that I certainly would have never thought of.

Something that struck me while reading this paper was a sudden realization of my own idiocy. I have always thought that of course the rich should be taxed more heavily as the loss of utility that stems from losing a single monetary unit is always going to be less for someone with more money than for someone with less. What I never considered was the next logical step that the authors point out: if we are going to tax based on marginal utility lost as defined by a utility function uniformly applied to every individual, then we will need to tax the richest individual at 100% for any amount in excess of the income (or wealth) of the second richest individual, and then tax them both at 100% for all amounts in excess of the third richest individual, and so on until we have raised the required revenue or everyone has the exact same wealth. Well duh. Clearly this is not something we would advocate outside of socialism, but it never crossed my mind as the logical consequence of my cursory thoughts about taxation. So if there's one thing I have learned it is that my brain isn't good for much beyond chasing sheep.

Further hand-wavey attempts are made to justify a progressive tax on the philosophical basis of equality. As one might expect, there are plenty of arguments in favor of greater equality within a society, but there are an even greater number of problems with any particular mechanism of bringing about greater equality; such is the case with a progressive tax as the vehicle for social harmony. As in the more economics-focused arguments, there is no knock-out reason that progressivity should be viewed as a good thing, but there is no reason to believe otherwise either.

In the end, as the authors point out, the reader is left only with his original general feeling that a progressive tax is probably a good thing. No proof has been given to back up this feeling, but at least there has been no solid contradictory evidence either. Overall it seems like a progressive tax is the direction that society ought to go in (or already has gone in, even long before the article was conceived) but because there is no way to measure the benefit of progressivity, there is no known way to design a progressive tax so as to maximize its effectiveness and minimize its costs.

Now look at that, I've read a whole tax paper. I've only scratched the surface of my notes -- I will have to debate whether or not to go into greater detail the next time around or just keep it light and fluffy. Next up: Boris I. Bittker, A “Comprehensive Tax Base” as a Goal of Income Tax Reform, 80 Harv. L. Rev. 925 (1967).

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