Can Tax Policy Create Sustainable Intergenerational Equity?

Equity is one of the metrics by which tax policy is traditionally analysed—this metric contemplates the fairness or justice of tax policy. Tax policy has the potential to promote equity not only for the current generation but also for the generations that follow.

To help achieve intergenerational equity, we argue that tax policy should be assessed from the lens of ‘sustainable intergenerational justice.’ By assessing tax policy from this lens, it becomes a powerful tool for ensuring the prosperity of future generations.

What is sustainable intergenerational justice?

Intergenerational justice involves comparing the well-being of one generation with that of other generations. Most of us would agree that to attain intergenerational justice, the current generation must ensure that future generations have adequate resources to sustain life and prosperity. We go further by assuming that, at a minimum, intergenerational justice demands that future generations should be able to live at least as well as the current generation.

As a result, intergenerational justice is inherently tied to sustainability and the idea that the current generation should leave the Earth in a survivable condition so that future generations can thrive. Along the lines of the so-called Lockean proviso of leaving ‘enough, and as good, left in common for others,’ sustainable intergenerational justice requires the current generation to use resources at the same rate that it replaces them or develop economic substitutes for them.

Government choices will have an impact

Government choices about spending, the level of taxation, and the mix of taxes and tax incentives will impact the current generation’s use of resources, thus impacting the future generations’ access to resources.

First, government spending will impact the resources available to future generations, especially as government debt and deficits grow. Although deficit spending may make sense to smooth out the effects of business cycles or to spread the costs of long-term projects across generations, sustainable intergenerational justice norms will be violated if government deficits and debt impose burdens on future generations.

Sustainable intergenerational justice norms require each generation of taxpayers to pay for the government programs that benefit that generation.

For example, the US Federal Government is currently spending far more than it is raising in revenue. If current laws generally remain unchanged, the US Federal Government’s deficit is projected to grow from 4.2% of gross domestic production (GDP) in fiscal year 2019 to an average of 7.9% of GDP in fiscal years 2040-2049; and the public debt will grow from 78% of GDP in fiscal year 2019 to 144% in fiscal year 2049. These figures come from the 2019 Long-Term Budget Outlook of the Congressional Budget Office. The 2020 Long-Term Budget Outlook shows that the coronavirus pandemic has made the long-term fiscal picture even worse.

Welfare programs like Social Security, Medicare, and other post-employment benefit programs should be fully funded by the current generation. With respect to Social Security, several recent proposals have called for various combinations of tax increases and benefit cuts to bring the program into actuarial balance over the seventy-five-year projection period.

Similarly, the US Federal Government should raise taxes (or cut benefits) to bring Medicare’s finances into balance. And when it comes to funding post-employment benefit programs like pensions, State and local government employers should contribute the full amount needed to cover the pension liability attributable to each employee’s salary—rather than falling behind in their contributions and making up the shortfall in installments over the following ten, twenty, or even thirty years.

Taxes can create more resources for future generations

Second, government choices about the level of taxation will also impact the resources available to future generations, since taxes can influence individual decisions about working, saving, and consumption.

High marginal tax rates can create disincentives for taxpayers to work or save. The empirical evidence suggests that high marginal tax rates on labour income can lead individuals to work fewer hours or to withdraw from the workforce completely. In the US, marginal tax rates on labor income range up to 37% at a $622,050 threshold for married couples filing joint tax returns. In contrast, investment income in the US from long-term capital gains or stock dividends is generally subject to federal income tax rates from zero to 23.8% in 2020.

To avoid inefficient allocation of labour and capital, we favour broadening tax bases to keep marginal tax rates as low as possible. In the US, the bases of the individual income tax; payroll tax; state and local sales tax and property tax; and estate, inheritance, and gift taxes all constitute tax bases that could be broadened. Currently, these taxes collect very little revenue compared to the potential amount available in the base. Because exclusions, deductions, credits, and many other tax expenditures shrink each of these tax bases, tax rates must be higher on each taxable base to collect the revenues needed.

By broadening these tax bases, an increasing amount of economic activity could be subjected to taxation and marginal tax rates could be reduced. This would reduce the economic distortion of these taxes, enabling more economic growth that will generate more economic resources for future generations.

Taxes can influence the mix of resources available to future generations

Third, government choices about the mix of taxes and tax incentives can also affect the resources available to future generations.

Taxes and tax expenditures should be used to prevent individuals from consuming goods at levels that are not socially optimal. For example, the US Federal Government should curtail fossil fuel tax expenditures and should impose taxes on carbon and gas use. Any regressive effects on low-income families could be mitigated by carbon and gas tax rebates. The Government could also promote renewable energy use by awarding tax credits, but this policy choice is not as effective as imposing gas and carbon taxes. Tax credits lower the cost of and increase demand for electricity.

In addition to promoting optimal energy use, the US Federal Government could promote education and research through tax policy, enhancing the human capital of future generations. The US Federal Government could increase the tax benefits available to individuals for tuition, fees, and books under the American Opportunity Tax Credit. To ensure that the credit benefits low-income students who are less likely than high-income students to attend college, the credit should be fully refundable (so it is paid as a cash subsidy if the taxpayer has insufficient tax liability).

Finally, the US Federal Government should correct upside-down subsidies that exacerbate inequality. One such subsidy is the mortgage interest deduction in the income tax, which is proportionate to a taxpayer’s marginal tax rate and thus provides greater relief to wealthy taxpayers. The Government should repeal this deduction and redirect the funds to other investments that promote economic growth or sustainable resources.

Tax policy is a powerful tool for intergenerational equity

By using taxes and tax expenditure subsidies to correct suboptimal externalities, the Government can make the economy more efficient, promote greater economic growth, and change the mix of resources that are available for future generations.

As baby boomers, we might ask whether we are ‘better off’ than our parents. We have colour TVs and personal computers, but perhaps they had cleaner air and water. We may live longer, but their lives may have been less hectic. If we ask whether our children will be ‘better off’ than us, the answer is not clear.

Tax policy is one powerful tool that can help ensure that our children are able to live at least as well as we do. Assessing tax policy through the lens of sustainable intergenerational justice is a means to achieve this end.

 

Adapted from Jonathan Barry Forman & Roberta F. Mann, Borrowing from Millennials to Pay Boomers, 36 Ga. St. L. Rev. 799 (2020). Although this article was written before the global COVID-19 pandemic, the authors assert that their recommendations still apply, perhaps even more so. The authors would like to thank Divine Zheng, University of Oregon School of Law, J.D. candidate 2021, for her assistance in creating this blog post.