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Prof. Chris Sanchirico on "Tax Eclecticism"

April 13, 2011

Faculty Research Brief Series

Chris William Sanchirico, Samuel A. Blank Professor of Law, Business and Public Policy; Co-Director, Center for Tax Law and Policy
Chris William Sanchirico
Samuel A. Blank Professor of Law, Business and Public Policy; Co-Director, Center for Tax Law and Policy

What should determine the taxes that an individual pays? Specifically, what potentially taxable attributes should be included in the government’s calculus of the tax an individual must pay and the transfers (that is, tax reductions) she is entitled to receive? The question is among the most elemental and perennially controversial in tax law and policy.

Under the current U.S. tax and transfer system, an individual’s taxes and transfers are based on a long and varied list of personal attributes: the taxpayer’s income from various sources, expenses of various kinds, assets, liabilities, age, and family structure.

But despite the eclectic nature of the current system, the dominant view among tax scholars is that the tax base should not be so eclectic – that achieving the optimal balance of revenue, efficiency, and equity requires basing taxes and transfers on a single taxable attribute, namely labor earnings, and not also on other potentially taxable attributes such as capital gains. The optimality of such labor-earnings-only taxation is regarded as “the plain vanilla case” or the “natural model.” Circumstances in which a more eclectic tax base is warranted are described as “exotic” or as “theoretical curiosities.”

In a recent paper, however, University of Pennsylvania Law School Professor Chris William Sanchirico asserts that – with regard to balancing revenue, efficiency, and equity – tax eclecticism is in fact the optimal model, and labor-earnings-only taxation, the exotic exception. Sanchirico’s paper, Tax Eclecticism, does not defend the often frustrating complexity of the current U.S. tax system, but rather argues for the general principle of tax eclecticism.

Sanchirico, a Ph.D. economist as well as a legal scholar, supports his argument for tax eclecticism with mathematical analysis that focuses on the impact of including capital gains in the tax base.

Sanchirico’s argument has two parts. The primary objective of the paper concerns the three criteria of revenue collection, economic efficiency, and the mitigation of economic inequality. Sanchirico asserts that basing monetary flows between individuals and the government on a more inclusive set of taxable attributes makes it possible to achieve a better balance of these three competing criteria. The second objective of the paper concerns a fourth criteria: the administrability of the tax and transfer system. Sanchirico argues that an eclectic tax base need not make the tax substantially more difficult to administer.

Although Sanchirico’s argument for an eclectic tax base is somewhat consistent with the U.S. tax system as it actually is, it swims against a powerful tide of thought among many tax scholars regarding how the tax system ought to be.

The paper has important implications for the long-running debate over whether capital gains should be taxed in addition to labor earnings. Accordingly, it casts doubt on the consensus view that the income tax, which taxes both capital and labor income, ought to be replaced with a consumption tax, which (under certain special conditions) is equivalent to a tax on labor earnings only.

The paper also contributes to the debate over whether non-tax-and-transfer legal and administrative policies – such as those concerning environmental regulation, public goods provision, immigration, and private law rules in tort or contract – should be set in part to reflect society’s redistributional goals, or rather be determined solely on the basis of efficiency.

Read the full brief by clicking the image below (PDF) or download the complete paper from the SSRN website.