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SPRING 2016
NEW YORK UNIVERSITY SCHOOL OF LAW
COLLOQUIUM ON TAX POLICY AND
PUBLIC FINANCE
"Reducing Inequality with a Retrospective
Tax on Capital"
James Kwak
University of Connecticut
School of Law
March 22, 2016
Vanderbilt-208
Time: 4:00-5:50 pm
Number 8
SCHEDULE FOR 2016 NYU TAX POLICY COLLOQUIUM
(All sessions meet on Tuesdays from 4-5:50 pm in Vanderbilt 208, NYU Law School)
1. January 19 - Eric Talley, Columbia Law School. "Corporate Inversions and the unbundling of
Regulatory Competition."
2. January 26 - Michael Simkovic, Seton Hall Law School. "The Knowledge Tax."
3. February 2 - Lucy Martin, University of North Carolina at Chapel Hill, Department of
Political Science. "The Structure of American Income Tax Policy Preferences."
4. February 9 - Donald Marron, Urban Institute. "Should Governments Tax Unhealthy Foods
and Drinks?"
5. February 23 - Reuven S. Avi-Yonah, University of Michigan Law School. "Evaluating BEPS"
6. March 1 - Kevin Markle, University of Iowa Business School. "The Effect of Financial
Constraints on Income Shifting by U.S. Multinationals."
7. March 8 - Theodore P. Seto, Loyola Law School, Los Angeles. "Preference-Shifting and the
Non-Falsifiability of Optimal Tax Theory."
8. March 22 - James Kwak, University of Connecticut School of Law. "Reducing Inequality
With a Retrospective Tax on Capital."
9. March 29 - Miranda Stewart, Australian National University. "Transnational Tax Law:
Reality or Fiction, Future or Now?"
10. April 5 - Richard Prisinzano, U.S. Treasury Department, and Danny Yagan, University of
California at Berkeley Economics Department. "Partnerships in the United States: Who
Owns Them and How Much Tax Do They Pay?"
11. April 12 - Lily Kahng, Seattle University School of Law. "Who Owns Human Capital?"
12. April 19 - James Alm, Tulane Economics Department, and Jay Soled, Rutgers Business
School. "Whither the Tax Gap?"
13. April 26 - Jane Gravelle, Congressional Research Service.
"Policy Options to Address Corporate Profit Shifting: Carrots or Sticks?"
14. May 3 - Monica Prasad, Northwestern University Department of Sociology.
"The Popular Origins of Neoliberalism in the Reagan Tax Cut of 1981."
REDUCING INEQUALITY WITH A
RETROSPECTIVE TAX ON CAPITAL
James Kwak*
Inequality in the developed world is high and growing: in the
United States, 1% of the population now owns more than 40% of all
wealth. In Capital in the Twenty-First Century, economist Thomas
Piketty argues that inequality is only likely to increase: invested capital
tends to grow faster than the economy as a whole, causing wealth to
concentrate in a small number of hands and eventually producing a soci-
ety dominated by inherited fortunes. The solution he proposes, an an-
nual wealth tax, has been reflexively dismissed even by supporters of his
overall thesis, and presents a number of practical difficulties. However,
a retrospective capital tax--which imposes a tax on the sale of an asset
based on its (imputed) historical values--can reduce the rate of return
on investments and thereby slow down the growth of wealth inequality.
A retrospective capital tax mitigates or avoids the administrative and
constitutional problems with a simple annual wealth tax and can reduce
the rate of return on capital more effectively than a traditional income
tax. This Article proposes a revenue-neutral implementation of a retro-
spective capital tax in the United States that would apply to only 5% of
the population and replace most existing taxes on capital, including the
estate tax and the corporate income tax. Despite conventional wisdom,
there are reasons to believe that such a tax could be politically feasible
even in the United States today.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
I. THE PROBLEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
II. AN ANNUAL NET WEALTH TAX . . . . . . . . . . . . . . . . . . . . . . . . . 198
A. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
1. Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
2. Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
3. Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
B. International Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . 203
C. Constitutionality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
D. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
* Associate Professor and William T. Golden Scholar, University of Connecticut School
of Law. I would like to thank Daniel Hemel, Richard Kay, Willajeanne McLean, Peter Siegel-
man, and Stephen Utz for their suggestions and encouragement, and the editors of the Cornell
Journal of Law and Public Policy for their editorial assistance.
191
192 CORNELL JOURNAL OF LAW AND PUBLIC POLICY [Vol. 25:191
III. TAX THEORY INTERLUDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
A. Consumption and Income Taxes . . . . . . . . . . . . . . . . . . . . . 208
B. Taxing Returns to Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 210
C. Income and Wealth Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 212
D. Why Tax Capital Income at All? . . . . . . . . . . . . . . . . . . . . 213
IV. AN INCOME TAX ON CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
A. Not Big Enough . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
B. Realization and Deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
V. A RETROSPECTIVE CAPITAL TAX . . . . . . . . . . . . . . . . . . . . . . . . 221
A. Basic Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
B. Imputing Past Values at the Risk-Free Rate
of Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
C. Reducing r with a Retrospective Capital Tax . . . . . . . . . 225
D. A Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
1. The Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
2. Death and the Estate Tax . . . . . . . . . . . . . . . . . . . . . . . 230
3. Progressivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
4. Pass-Through Taxation . . . . . . . . . . . . . . . . . . . . . . . . . 233
5. Tax Simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
6. Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
E. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
VI. COULD IT HAPPEN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
INTRODUCTION
Don Draper and Roger Sterling are both handsome, impeccably
dressed, and very, very rich.1 But they came by their money in com-
pletely different ways. Don is the proverbial self-made man, the bastard
son of a prostitute who climbed to the top of the advertising industry
through pluck, hard work, and an enormous amount of talent. Roger
inherited both his share of the partnership where they work and his major
account from his father, and his main skill seems to be lavishly entertain-
ing clients.
Don and Roger are business partners and (usually) good friends.
But in the contest between inheritance and merit--here referring to abil-
ity and effort, not moral rectitude--Don's side seems to be winning.
Over the course of the 1960s, Don grows in importance from a valuable
employee to the dominant partner at the firm, while Roger loses his sta-
tus as chief rainmaker to Pete Campbell and sees his wealth sliced into
pieces by successive divorces. (A scion of old New York aristocracy
who now must work for a living, a relentless striver driven by raw ambi-
1 Mad Men (AMC television broadcast 2007-2015).
2015] REDUCING INEQUALITY 193
tion, Pete symbolizes all by himself the decline of inherited privilege and
the rise of earned income.) In 1960s America--as seen through the lens
of Mad Men--the old hierarchy of birth is giving way to a new order
based on talent and hard work.2 "I always envied that--the way you
were always reaching," Roger says to Don one evening over drinks. "I
always envied [that] you didn't have to," Don responds. "In another life-
time I'd have been your chauffeur."3
Everyone knows we live in an unequal society. In the United
States, the "1%," made famous by Occupy Wall Street, take home more
than 20% of all income4 and own more than 40% of all household
wealth.5 How we see these outcomes, however, depends on their under-
lying cause. Many people look more favorably on inequality resulting
from ability and effort than inequality resulting from inheritance. In this
respect, the worldview of Mad Men is fundamentally meritocratic--and
optimistic.
If the 1960s belonged to Don, however, the future belongs to
Roger--who, despite his divorces and his expensive lifestyle, never
seems to run out of cash, and probably becomes richer than ever when
the agency is sold to McCann Erickson.6 This is the central argument
that Thomas Piketty makes in Capital in the Twenty-First Century.
Piketty's empirical research indicates that throughout most of history,
invested wealth has grown faster than the overall economy; he projects
that the same relationship will hold in the future.7 (The 1960s actually
were an exception, thanks to high economic growth, high taxes, and low
interest rates8--a rare opportunity for people like Don Draper to join
Roger Sterling at the pinnacle of American society.) Inequality9 of
wealth will increase as a logical consequence as the richest families--
who can afford to save most of their investment returns--watch their
fortunes grow faster than the aggregate wealth of society.10 Or, as a
wealthy friend said to me apologetically, "Once you have a lot of money,
2 As if to drive the point home, Roger's mother leaves most of her assets to zoo animals.
Mad Men: The Doorway (AMC television broadcast Apr. 7, 2013).
3 Mad Men: Time & Life (AMC television broadcast Apr, 26, 2015).
4 Facundo Alvaredo et al., United States, THE WORLD TOP INCOMES DATABASE, http://
topincomes.parisschoolofeconomics.eu/#Country:United%20States (last visited Apr. 17,
2015). Income includes capital gains.
5 Emmanuel Saez & Gabriel Zucman, Wealth Inequality in the United States Since
1913: Evidence from Capitalized Income Tax Data tbl.1 (Nat'l Bureau of Econ. Research,
Working Paper No. 20625, 2014), .
6 Mad Men: Waterloo (AMC television broadcast, May 25, 2014).
7 See THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST CENTURY 20-21 (Arthur
Goldhammer trans., 2014).
8 See id. at 355-56.
9 See id. at 1-35.
10 See id. at 10.
194 CORNELL JOURNAL OF LAW AND PUBLIC POLICY [Vol. 25:191
it's like you're in a rocket ship that takes off. You just can't help reach-
ing escape velocity."
How can we prevent the continual growth of inequality and the
eventual domination of society by inherited wealth? One implication of
Piketty's analysis is that policies that seek to promote equality of oppor-
tunity--investing in education, for example--are unlikely to stem the
tide. If the rate of return on invested wealth exceeds the rate of eco-
nomic growth in the long term, high levels of inequality are inescapable.
Piketty recommends a global, annual wealth tax, with higher rates for the
largest fortunes, in order to slow down the rate at which wealth accumu-
lates.11 This proposal, however, has been one of the least well-received
parts of Capital in the Twenty-First Century, roundly criticized as admin-
istratively unworkable, economically misguided, politically impossible,
or unconstitutional (in the United States).12 Many of these criticisms
have some merit. But this does not mean that we should simply give up.
This Article takes up the challenge of identifying a tax system that
can slow down the process of wealth concentration. After considering
various alternatives--including an annual wealth tax--I recommend a
retrospective capital tax, which imposes tax liability when cash is re-
ceived from investments while approximating the economic impact of a
wealth tax. I provide a detailed proposal, including thresholds and tax
rates, to show how this retrospective tax can replace most existing taxes
on capital (the estate tax, the corporate income tax, and most individual
taxes on investment income) while maintaining the current overall tax
burden.13
This Article is part of the response by the legal academy to the is-
sues raised by Piketty's work and to the problem of rising inequality in
general. Many legal scholars have written short-form responses to or
book reviews of Capital in the Twenty-First Century.14 There have been
fewer articles focusing on how the law can address the problem of con-
tinuing wealth accumulation highlighted by the book. Shi-Ling Hsu has
11 Id. at 515-17.
12 See infra Part II.
13 See infra Part V.D.
14 See, e.g., David Singh Grewal, The Laws of Capitalism, 128 HARV. L. REV. 626
(2014) (reviewing THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST CENTURY (2014)); Sa-
muel Moyn, Thomas Piketty and the Future of Legal Scholarship, 128 HARV. L. REV. F. 49
(2014); Neil H. Buchanan, Thomas Piketty's Book Is Masterful and Important, but Ultimately
a Sideshow, JOTWELL (July 8, 2014),
ful-and-important-but-ultimately-a-sideshow; Kent D. Schenkel, Trusts and Estates Law and
the Question of Wealth Distribution, JOTWELL (July 8, 2014),
trusts-and-estates-law-and-the-question-of-wealth-distribution/; Daniel Shaviro, The Return of
Capital, JOTWELL (July 8, 2014), ; Michael J.
Zimmer, (Re)Booting the Dismal Science, JOTWELL (July 8, 2014), .
com/rebooting-the-dismal-science/.

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