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Article Excerpt
INTRODUCTION
The other essays in this volume make clear that the future of taxation depends importantly on innovations in the gathering and processing of information. As the so--called information economy continues to evolve, systems of taxation, which obviously require detailed and accurate information in order to function, will have to adapt as well. (1) In parallel with these innovations in the processing of traditional tax-related information, there have also been stunning technological developments in the identification of new information about individual human characteristics that may also have profound implications for taxation. We are speaking about the human genome and the vast amount of information that is now or soon will be available merely from a sample of a person's genetic material. Recent advances in genetic research have captured the public's imagination and promise to revolutionize our approach to treating human disease. (2) The question we wish to pursue, however, is how such advances in genetic research might bear on tax policy.
To explore that question, we consider how progress in genetics--specifically, the proliferation of knowledge about the human genome---may influence the feasibility and desirability of a tax that is based on individual human endowments, or, to use the economist's preferred term, a tax based on ability. The terms "endowment" or "ability" in this context refer to a measure of an individual taxpayer's innate lifetime earning capacity or the taxpayer's potential wage rate--an approximation of the income that an individual could generate during her lifetime if she chose to pursue her highest valued use, as that use is defined by the market. (Below we will explain why "endowment" may be a more descriptive term for what we have in mind than the term "ability"; however, consistent with the literature in this area, we will use the terms largely interchangeably.)
According to tax policy commentators, the benefit of basing tax liability on individual endowment rather than on, say, income or consumption would be a reduction in the efficiency cost of raising tax revenue for any given level of distributional consequences. The efficiency benefit of an endowment tax (3) would be the same as that of any lump-sum tax: because the endowment tax targets innate characteristics of individuals and, thus, would not depend on individual choices, the tax would avoid labor/leisure--and any other--distortions and, hence, would avoid the dead weight losses associated with alternative taxes such as those based on income or consumption. In addition, an endowment tax--unlike some other lump-sum taxes, such as a head tax--would allow the tax burden to be distributed in a manner that many would consider distributionally fair. (4) Under an endowment tax, the greater is a person's innate endowment to command and enjoy economic resources, the greater her tax burden would be. And the less her endowment is, the less her tax burden would be. (5)
Everyone agrees, however, that a primary difficulty with an endowment tax--and a difficulty that many commentators regard as insurmountable--is its impracticality. How could the taxing authority ever reliably determine an individual's innate ability to produce and enjoy income? What sort of test would the government use to determine a person's innate lifetime earning potential? (6) This is where genetic technology enters, or may someday enter, the picture.
The rapid technological progress in the understanding of the human genome may eventually provide a reliable way to estimate the value of something that approximates an individual's endowment--using the person's genetic information. That is, insofar as there are human genetic markers that are statistically correlated with lifetime income or other measures of well-being, such markers might be used in a tax-and-transfer regime. One form a genetic endowment tax might take would be as a separate, free-standing tax-and-transfer program, with the taxes or transfers calculated at birth (if not earlier) and actual remittances made throughout a person's life. (7) But other approaches are possible. Instead, the results of the genetic endowment test could simply be used as an input in the determination of an individual's tax liability, for example, as blindness, age and marital status are used in the current U.S. income tax system. Under such a system, genetic information would be used as a "tag," in the language of Akerlof (1978). Akerlof showed that any immutable characteristic of an individual that is correlated with ability can improve the equity-efficiency tradeoff of a tax system, because the use of such tags can produce some degree of redistribution without any efficiency cost (due to the immutability of the characteristic), thus reducing the need for distortionary redistributive tax instruments (which are not based on immutable characteristics), such as the graduated income tax. (8)
So why do we not already have a genetic endowment tax? For one thing, we do not presently have a test for overall genetic endowment. Despite all of the recent advances in genetic testing, scientists have yet to isolate the aspects of a genetic profile that measure an individual's innate capacity to produce income or well-being. There is, of course, a sense in which the existence of such a gene or combination of genes is problematic, even as a conceptual matter. The correlation of a particular genetic characteristic (which is innate) with lifetime income or lifetime well-being will depend on a number of contingent, external factors. Thus, whether a specific genetic profile will lead to higher lifetime well-being will depend on how the economy in which the person lives values the particular attribute associated with that profile. For example, whether a gene or combination of genes and epigenes for mathematical proficiency, if there is such a thing, would correlate with a relatively high lifetime income will depend upon the value placed on such a skill by the economy in which that individual happens to live.
Notwithstanding that qualification, we can still imagine science some day progressing to a point at which it is possible to identify significant and stable statistical correlations between a given genetic profile and lifetime earnings or even overall well-being. At least, such a development is not beyond our imagination. Indeed, according to some reports, researchers have in fact uncovered evidence of a gene that appears at least to influence some aspects of intelligence (9) and have certainly identified genes that affect one's propensity to acquire debilitating diseases, both of which would seem to be characteristics that would be importantly relevant to measuring lifetime well-being in any likely future economy. Thus, in the spirit of exploration and speculation that inspired this conference on the future of taxation and technology, our paper will explore how genetic information might be used in some future tax-and-transfer regime.
Not every conclusion or speculation in this paper, however, is pure science fiction. Some of the existing genetic research that identifies links between particular genes or collections of genes and numerous debilitating and sometimes deadly diseases could also be used as part of an endowment tax regime. Insofar as poor health suggests lower overall well-being, an endowment tax regime based on health-related genes could be social-welfare enhancing. (10) This conclusion is strengthened by the fact that there is a strong correlation between health and income. In this paper we sketch out how such a genetic endowment tax might be designed.
Even if a genetic endowment tax were to become a practical possibility, there would still be critics of such a policy. For some of those critics, the taxation of human potential-as opposed to taxing the realization of that potential as, say, income--is per se wrong, because such a tax would in some sense force individuals to work who prefer not to work, to work more than they desire, or to work in occupations that they otherwise would not choose. This is sometimes called the problem of "talent slavery" or "wage slavery." (11) For other commentators the case for adopting an endowment tax is problematic because, depending on one's assumptions about taxpayer utility functions, it is not clear that an endowment tax will increase overall social welfare. (12) Although we do believe (and argue below) that some (though not all) of these criticisms of endowment taxation have been overstated, we do not in this essay attempt to offer a systematic defense of an endowment tax. Indeed, we do not argue for or against any particular change in policy. Rather, the point of the essay is to describe what a particular type of endowment tax--what we call a genetic endowment tax--might look like in some not-too-distant future world, and to begin an examination of its advantages and disadvantages. Thus, this paper is meant not to advance any particular policy change, but to kindle the imagination.
In that spirit, we highlight one rationale for the adoption of an endowment tax that has not been discussed in the economic or philosophical literatures on the subject. Even if one agrees with the fundamental criticisms of the genetic endowment tax, once the relevant genetic tests become available, government policymakers will inevitably face the question of how to respond. This is because, even if the government does nothing, even if no genetic endowment tax regime is adopted, private employers (in deciding whom to hire and on what terms) and private insurance markets (in deciding whom to Insure and on what terms) can be expected, in the absence of an effective legal prohibition, to Incorporate such genetic tests into their hiring and underwriting practices. Such market responses would tend to exacerbate existing inequalities of well-being that flow from genetic differences. (13)
As we explain below, the government might anticipate or react to these various developments in a number of different ways. One possibility, to which much legal scholarship has attended, (14) would be a regulatory response; specifically, the government could adopt laws limiting the use of genetic information by insurers and employers. In fact, such genetic antidiscrimination rules have been adopted in many states in the U.S. (15) Also, federal law restricts the use of genetic information in certain situations by insurers seeking to exclude pre-existing conditions. (16) In addition, President Clinton in 2000 issued an executive order (Executive Order 13145) prohibiting federal agencies from obtaining genetic information about their employees or job applicants and from using genetic information in hiring and promotion decisions. In May 2008, Congress overwhelmingly passed (and President Bush promised to sign) the Genetic Information Nondiscrimination Act, which prohibits health insurance companies from using genetic information to deny benefits or raise premiums for individual policies, and sets large fines for employers who use genetic information in making decisions about hiring, firing, or compensation. The bill does not address discrimination by long-term care insurers or life insurers.
Such rules, we argue, can be understood as a form of indirect (somewhat hidden) genetic endowment tax-and-transfer regime. Alternatively, the government could allow insurers and employers to use genetic information to sort employees (that is, eliminate the existing genetic antidiscrimination laws) and could then implement a direct system of endowment taxation and transfer based on genetic information.
If, however, the government were to choose a third path--to allow genetic discrimination by repealing any existing genetic antidiscrimination laws without adopting an explicit genetic endowment tax-and-transfer regime as a replacement--we explain how the market itself might respond yet again, perhaps in the form of what we call "endowment insurance," which would be, in effect, a market-provided form of endowment taxation.
Whichever of these paths is taken, our general conclusion is that the increasing availability of genetic...
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