How should governments promote distributive justice?: A framework for analyzing the optimal choice of tax instruments


What mix of policy instruments should governments employ to raise revenues or to promote distributional equity? The dominant answer to this question in the tax theory and public finance literatures is that (with limited exceptions) governments should rely exclusively on a progressive consumption tax. Thus, among other implications, the dominant view is that governments should not tax capital income or wealth, and that legal rules should not be designed to promote distributive justice.

In contrast, this Article argues that governments should potentially make use of a number of tax and non-tax policy instruments to raise revenues and to promote distributional equity. Furthermore, this Article argues that governments may have much greater capacity to raise revenues and to promote distributional equity at lower efficiency costs than is generally recognized. Whereas the existing theoretical literature focuses on a small number of distortionary costs that result from taxation (in particular, on labor-to-leisure and saving-to-spending distortions), this Article analyzes the implications of taxpayers engaging in a diverse variety of tax-gaming responses. To the extent that taxpayers respond to different tax instruments through different forms of tax gaming, this Article demonstrates that governments may be able to raise revenues and promote distributional equity more efficiently by employing a number of different policy instruments. 

Based on these insights, this Article develops a sufficient-statistics framework for analyzing optimal-choice-of-tax-instruments questions. Then, applying that framework, this Article argues that at least some legal rules should be designed to promote distributional equity. This Article further shows how to roughly calculate the optimal extent to which each such legal rule should be calibrated to promote distributional equity.