The Inherent Bias of Income

Scholars and lawmakers regularly grant the definition of income an air of relative objectivity. Economic theory gives us a definition of income—I = C + ∆W —and the law places items in the appropriate bucket to determine a given individual’s income. Tax is simply the law of dollars and cents; a measuring of inflows and outflows that generates a taxable income figure to which we apply a rate. In this view, the definition of income is not inherently biased. This view is error. The bias in the Code cannot be explained simply by self-interested parties corrupting an otherwise objective system. Nor can it be explained simply as lawmakers impermissibly importing their own biases, either intentionally or unintentionally, into drafting or interpretation of the Code. Nor can it be explained simply as the result of a sound, unbiased regime mapping onto an unequal society. Bias is, instead, an inherent aspect of the definition of income itself. The inherent bias in the definition of income turns on its reliance upon identifying and determining the scope of choices available to an individual. The first contribution of this Article is to clearly articulate the role that choice plays in tax law and policy. In its free-market leanings, tax views constraints or influences on choice as a means of evaluating the soundness of a give rule or tax regime. This Article terms this role of choice in tax as choice as metric. The non-recognition regimes of business entity formation are often justified on the basis of neutrality, for example. When instead tax aims to regulate and influence behavior, tax views choice differently. Therein directing choice is the express goal. So-called sin taxes are controversial examples of such use of tax as a driver of decision-making. This Article terms this second role of choice in tax choice as feature. There are voluminous literatures on the wisdom or error of both the choice as metric and choice as feature roles of choice in tax. While some discussion of both is necessary, entering fully into the fray is not the focus of this paper. Instead, this Article makes the novel contribution of identifying and describing the third, undertheortized role of choice in tax: choice as heuristic. Choice as heuristic describes the role perceived choice plays in defining income itself. Consider the example of employer-provided housing. The employee who must live on an oil rig to meet the demands of her position does not have taxable income in the form of the value of the housing provided by her employer, per §119. How did Congress arrive at the decision to provide such an exclusion from income? It, alongside the courts, debated the extent to which the employee had a choice to do otherwise. Perceiving the range of options available to her to be at best limited, if not nonexistent, doctrine arrived at the conclusion that exclusion was appropriate. Her deeply-constrained choice calls into question for some whether she has even received something of value—she might loathe living on the oil rig and thereby have reduced welfare from having to do so. For others, it is the lack of control she has over the receipt of the seeming in-kind benefit that pulls it from the income category. Setting aside whether the exclusion for qualifying employer-provided housing is good or bad tax policy, it is one of a multitude of examples of when courts, the Service, and Congress rely upon their perception of an individual’s options—perceived choice or lack thereof—to determine the scope of the concept of income itself. Current doctrine, at a minimum, unreflectively lapses into and frequently expressly requires decisionmakers to assess the range of options available to an individual as it seeks to define income. And doing so cloaks an array of biased assumptions about who an individual is in the more seemingly-neutral categories of tax: income, consumption, deduction, exclusion, and the like. The Code does not expressly say that the paradigmatic taxpayer is a man with no childcare responsibilities; but it relies upon such bias when it categorizes childcare costs as a non-deductible consumption. This Article goes beyond existing critiques of the tax-treatment of childcare and other similar perennial debates to 1) offer a comprehensive explanation of the role of choice in tax and 2) argue that tax law’s definition of income requires the importation of bias such that discrimination is an inherent feature of the current concept of income. A full understanding of the role of choice in tax makes clear that the problem of choice in tax is more systemic—and the biases it invites into the doctrine more insidious—than has been broadly-appreciated. Part I of this Article provides a taxonomy that clarifies the multi-faceted role that choice place in tax law. Part II revisits three perennial debates in tax policy—the tax treatment of childcare, commuting, and medical expenses—examining them with the insights of the taxonomy developed in Part I. Part III concludes with the implications of the preceding Parts for tax law and policy.