Law and the New Dynamic Public Finance

• In Event: Tax Theory

Abstract

In recent years, economists in public finance and related fields have applied new models and methodologies to problems of inequality and economic insecurity. This innovative approach—known as “the new dynamic public finance”—grapples with productivity changes across the lifecycle and policy changes over time. The new dynamic public finance has generated important insights that cut against conventional wisdom in classical optimal tax theory, suggesting—for example—that capital income should be taxed and that higher capital taxes sometimes incentivize investment. Mainstream economics has assimilated many of these insights, but legal scholars have largely failed to engage with the new dynamic public finance literature.

This article explores the potential for cross-pollination between law and the new dynamic public finance. It explains the central intuitions underlying dynamic tax models and draws out implications for tax and other areas of law. The new dynamic public finance offers compelling reasons to adopt age-dependent tax schedules, generates novel justifications for the taxation of capital, and provides an original argument for applying different tax rates to single individuals and married couples. Beyond the Internal Revenue Code, the new dynamic public finance offers fresh perspectives on the design of social insurance programs and tort systems, and it sheds light on long-running constitutional debates ranging from direct taxation to due process. Ultimately, incorporating a new dynamic public finance perspective into tax and non-tax law can inform the crafting of a more comprehensive system of social insurance while enriching our understanding of the system we now have.

Author

• Daniel Hemel, New York University School of Law