Improving Tax Rules by Means-Testing: Bridging Wealth Inequality and "Ability to Pay"

01 January 2018

The federal income tax can and should do more to address wealth disparities and income inequality. The income tax does not directly count wealth, and the realization rule and basis "step-up" at death exclude substantial amounts of income for the wealthy. The Constitution limits Congress's ability to tax wealth. Despite these serious challenges, this Article considers how to potentially bridge the gap between wealth and the income tax. For example, asset-based phase-outs in the income tax should pass muster without apportionment, although their bite would necessarily be limited. The Article posits that the public would be more receptive to phase-outs than more progressive tax brackets. Relevant to complexity, the existing literature has identified potential mark-to-market solutions to correct the exclusion of unrealized gains. The design of asset-based phase-outs would be prefigured to some extent by whether these proposals gain traction. The income tax, to be sure, cannot by itself solve the problem of wealth inequality. Principles of tax justice, however, arguably require greater attention to wealth in measuring the taxpayer's "ability to pay."