Please Don’t Make Our Tax System Any More Fair

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There is little that is universally agreed upon in tax policy debates. But everyone, and I mean everyone, from Donald Trump to Joe Biden, Kamala Harris, Bill and Hillary Clinton, Barrack Obama, George Bush, Ronald Reagan, Jimmy Carter, Richard Nixon, Lyndon Johnson, FDR, and many more, thinks that everybody should pay their “fair share” in taxes. All want a “fair” tax code.

Take our two most recent presidents, who share long-running eligibility for membership in the AARP but share little else ideologically. President Trump has concerns about the tax code as being unfair. President Biden, by contrast, routinely frames reform around the idea that everyone “should pay their fair share.”

While they use the same word, they mean different things—opposite things, in fact. For Trump, “unfair” points to process: the code is too complicated, too punitive, too tilted against “hardworking” people. He wants people to keep more of the money they make, and less of that money to be redistributed to those who he perceives as undeserving. For Biden, “fair” points to outcomes: the distribution of the tax burden is wrong because the wealthy and large corporations can end up paying less than he would prefer.

Same word. Different concept. That should bother us, because the word fair now functions less like a definition and more like a vibe. And a vibe is a terrible foundation for a tax system. This loose use of the word fair is what gives us some of our worst tax policy, like the corporate alternative minimum tax.

If we mean redistribution, we should say redistribution

So what do we really mean when we say “fair”?

Usually we mean some mix of two ideas:

  1. People should get to keep what they earn. This is the intuition behind low rates, broad bases, and skepticism of targeting. It’s the idea that the tax system should not punish success, should not create frictions, that taxpayers deserve predictable rules, and that the government should take only what it needs to carry out the minimal functions of a limited government.
  2. People who are down on their luck should be helped. This is the intuition behind progressivity, safety nets, refundable credits, and a willingness to use the tax system to reduce poverty by taking from those with wealth to give to those who do not have it.

Both are coherent moral views. Both can be defended. But they are extremely different, and to some extent, mutually exclusive. By definition, to redistribute to someone who is down on their luck, you must take that wealth from someone who generated it (or at least has it). (Of course, those who want to take the wealth argue those with it didn’t “earn” it, and those that have it claim that those who want to take it should earn it themselves). These two things imply different policies. They involve different tradeoffs. And yet we keep forcing both into the same word: fair.

That loose use of words has a cost. It lets us skip the hard tradeoff: How much redistribution do we want? How much are we willing to take from one group to give to another? How large transfers should be, which groups should be subsidized, which activities should be discouraged, and how much complexity and friction we’re willing to tolerate to accomplish those goals.

Because that’s the real argument. Not whether “fairness” is good.

“Fair” talk gives us a vibe-tax code

When a political system can’t agree on definitions, it starts governing by mood. That’s increasingly what tax policy looks like: symbolic fixes aimed at a feeling, often the feeling that someone, somewhere, is getting away with something.

The Corporate Alternative Minimum Tax (CAMT) is a perfect example of this style of lawmaking. The Inflation Reduction Act created a 15% minimum tax based on adjusted financial statement income (book income) for very large corporations, generally those with average annual financial statement income above $1 billion.    

The political story was simple: it is “unfair” that corporations reporting large profits to shareholders can have low taxable income and therefore low tax. So rather than simply fixing the tax code, lawmakers reached for the mood lever: If it feels wrong, slap a minimum tax on book income.

The same vibe shows up in the stock buyback excise tax. We have excise taxes on all the great sins: tobacco, firearms, alcohol, and, now, share repurchases. Treasury’s press release on the proposed regulations described the tax as helping ensure large corporations pay “more of their fair share.” This was bad policy, masked in the meaningless language of fairness.

Again, “fair share” stands in for the real question: What exactly is the problem we’re solving?

If the concern is that buybacks are tax-favored relative to dividends, say that, and measure it. If the concern is corporate underinvestment, say that, and show the evidence (there is no good evidence that buybacks lead to underinvestment). If the concern is distribution (that buybacks benefit shareholders), say that, and discuss whether taxing buybacks actually targets the intended group, or whether it changes payout policy in ways that are mostly cosmetic.

A tax system can’t be “fair” to everyone

Here’s the painful truth: in the “vibey” way we use “fair,” the tax code cannot be fair to everyone. A system that maximizes “people keep what they earn” will look unfair to someone who prioritizes helping the vulnerable. A system that maximizes redistribution will look unfair to someone who prioritizes reward for effort or property rights. A system that maximizes horizontal equity often requires complexity that violates the fairness intuition that the law should be simple and understandable. And a system that is simplest to administer may ignore nuances that many people consider morally relevant.

If we want more redistribution, we should argue for more redistribution. If we want less, we should argue for less. But we should stop laundering those disagreements through a word that means everything and therefore means nothing.

So please, don’t make “fairness” an objective of tax policy. I don’t want a tax code that is any more fair, because it always ends up being someone else’s version of fairness. Fairness is not an objective. It’s a mood. And mood-based tax law is how you end up with vibe taxes, designed to feel satisfying, not to work well.

  • Jeff Hoopes is a Professor at the University of North Carolina and the research director of the UNC Tax Center. Jeff received his PhD in Business Administration from the University of Michigan. He is a CPA in the State of Colorado. Jeff teaches Taxes and Business Strategy and Accounting and Public Policy to graduate and undergraduate students. He researches corporate tax, and his research focuses on the intersection of accounting, public economics and finance. He has published in many academic research outlets, and, has written opinion pieces published in media outlets such as the Wall Street Journal, Fortune, and The Hill, and his work has been cited in media outlets such as New York Times, Wall Street Journal, Newsweek, Forbes, CNN, NPR, Fortune, Washington Post, Time, The Atlantic, Bloomberg, and USA Today. He has testified before Congress, advised the Congressional Budget Office, worked on consulting projects with the Internal Revenue Service, and is on the Advisory Council of The Tax Foundation. Jeff co-hosts a podcast called Tax Chats.

    Professor at the University of North Carolina and the research director of the UNC Tax Center