Theodore P. Seto

Tax and Disability: Ability to Pay and the Taxation of Difference

Although people with disabilities make up some 20% of the American population, scholars have largely ignored U.S. tax provisions of particular relevance to them. This article undertakes the first such systematic study. In the process, it reexamines disability theory, tax theory, and the mechanical structure of the individual income tax system. Disability theory has changed dramatically over the past century, to the point that many tax rules important to people with disabilities are no longer justified by modern disability theory. Standard tax theory turns out to be inadequate to deal with the problems of people with disabilities because, consistent with its utilitarian origins, it generally assumes that taxpayers are identical except with respect to income; as a result, it lacks capacity to deal with other individual differences in ability to pay. The failure of theory to deal adequately with ability to pay, in turn, has placed serious strains on the mechanical structure of the individual income tax system as a whole, which has become increasingly incoherent. This article analyzes existing tax provisions of particular relevance to people with disabilities using an ability-to-pay approach to individual income taxation and a human variation paradigm of disability rights, justifying or reframing some and recommending repeal of others. Among other issues, it explores the general welfare doctrine and a dramatic expansion of the medical expense deduction, neither of which has received sufficient scholarly attention elsewhere. Ultimately, the article suggests, if the individual income tax system as a whole were to be reframed in terms of ability to pay, the mechanical complexity of that system could be rationalized and significantly reduced.

Drafting a Federal Balanced Budget Amendment that does what it is Supposed to Do (and No More)

Repeated proposals have been made to add a balanced budget amendment to the U.S. Constitution, most recently with the filing of H.J. Res. 58 on July 13, 2005. Almost all such drafts, including the draft currently pending, have resembled S.J. Res. 1, 104th Cong. (1995), narrowly defeated in March 1995 and June 1996. This paper, published in 1997 but not heretofore posted on SSRN, explores the technical problems inherent in such drafts. Because of those problems, it concludes, an amendment based on the approach taken in those drafts would be easy to circumvent, allowing Congress to claim to have balanced the federal budget while in fact incurring substantial deficits.

Does the Income Tax Cause Parents to Spend Too Much Time with Their Children?: Rethinking Mirrlees

In 1971, James Mirrlees published “An Exploration in the Theory of Optimum Income Taxation,” one of the most influential tax papers ever written. Unpacked, Mirrlees’ claim can be restated as follows: Assume that our undistorted decisions about how to allocate our time between paid and unpaid activities are welfare-maximizing. If so, any distortion of those decisions by the tax system is welfare-reducing. Unless the supply of labor is inelastic or income effects predominate, taxing income from labor will cause taxpayers to spend less time engaged in paid activities and more time in unpaid activities than would be welfare-maximizing. Because of the declining marginal utility of money, redistribution from high-income to low-income individuals is generally welfare-enhancing. Nevertheless, at some point the welfare losses from taxing labor income to effect redistribution outweigh the welfare gains produced by redistribution. This, in turn, (1) limits the overall amount of welfare-enhancing redistribution we can effect by taxing income from labor and (2) requires flat or declining marginal tax rates on such income. Stated in the abstract, the claim is plausible enough to have persuaded important segments of the tax and tax economic academy. In the intervening 40 years, however, empirical evidence has come to suggest that the claim is strongest when applied to parents, especially mothers, with young children – the one economically significant group that consistently demonstrates elastic responses to labor taxation. Survey data establishes that a very large portion of the unpaid time spent by American parents of children age 12 or younger – both fathers and mothers – is spent on the care of their own children. If taxes cause parents to spend more time on unpaid activities, therefore, they almost certainly cause parents to spend more time with their children. Any such behavioral distortion is, by hypothesis, welfare-reducing. As to parents, therefore, optimal tax theory’s claim is that progressive taxation causes parents to spend too much time with their children. At the very least, optimal tax theorists must be comfortable with the possibility that this is effectively their claim. But is the claim true? This paper approaches the question from within the standard preference-satisfaction utilitarian paradigm, using standard tax economic arguments – the perspective most sympathetic to the claim. Specifically, it focuses on two of the many assumptions Mirrlees used to make his mathematics tractable. First, he assumed that utility is absolute, not relative – that our utility curves do not depend on how much anyone else has. Second, he assumed that supply curves for consumption goods are similarly fixed and exogenous. In the case of parents, especially mothers, with young children, both assumptions are probably false. But if this is so, insufficiently progressive taxes may cause parents to spend too little time with their children. And if so, Mirrlees’ computations cannot be taken to be even provisionally correct, even within the welfarist paradigm. The paper then turns to the problem of GDP maximization – a goal regularly confused with that of welfare maximization. GDP maximizers rely heavily on the empirical literature Mirrlees’ paper triggered to argue that high top marginal rates trigger labor-leisure substitution. They then assume, generally without further evidence, that the substitution of leisure for labor by high-income taxpayers reduces GDP growth. Happily, the Reagan tax cuts tested this assumption nicely – advocates promised that those cuts would boost GDP growth. Contrary to predictions, however, average U.S. GDP growth declined in the decades after the Reagan cuts. The reasons are unclear. What this does mean, however, is that the Mirrlees literature cannot by itself be read to support the proposition that high marginal rates reduce GDP growth. And this, in turn, means that the constraints it imposes on real-world policymaking are much less significant than is commonly assumed.