Courts and tax policy: Slippery slope ahead
by Jonathan Rosenblum
April 20, 2001
Should the Israeli Supreme Court have the power to rewrite the tax code according to its notions of fairness or equality? Should it have the power to determine the allocation of monies in the national budget?
Those questions are starkly posed in one recently decided case and another that is currently pending. In the former, the Court struck down a municipal property tax discount for yeshiva students with large families. In the latter, Ministry of Religions income subsidies for yeshiva students are being challenged on the grounds that similar subsidies are not available to university students.
The obvious answer, in the abstract, to both the questions posed initially is no. The power of the purse is the greatest power belonging to the legislature in any democratic government, and there is a large presumption against tampering with that power by the other branches of government. The United States Supreme Court, for instance, has, to my knowledge, never struck down a statutory provision of the Internal Revenue Code as unconstitutional.
To understand that deference to the legislature, one must first appreciate how notoriously squishy are abstract terms like equality and fairness. Take a familiar example: the capital gains tax. Israel does not at present tax capital gains on the sales of shares purchased on local exchanges. In some sense, that exemption for capital gains is unequal. Two people with the same gross income for the year may end up paying vastly different amounts of taxes, depending on the source of their income.
Indeed the favorable treatment of capital gains advantages the rich over the poor because the latter have much more money available for speculative investments and earn a much higher percentage of their income from investments, as opposed to the sweat of their brow.
Crusaders for tax fairness often argue for a tax code free of distinctions between different types of income and with as few loopholes as possible. But it is unthinkable that the Israeli Supreme Court or any high court in the Western world would judicially strike down favorable treatment of capital gains income.
Courts recognize that such exemptions have many other purposes besides conforming to an abstract standard of fairness. The Israeli capital gains exemption, for instance, boosts the development of local stock exchanges and increase the capital available to local enterprises. Other tax exemptions are designed to encourage businesses to relocate on the periphery or development towns.
It is possible to adduce policy and economic arguments against such exemptions. And even their proponents will likely concede that such exemptions are a blunderbluss instrument that inevitably benefits many who would have acted the same way even without the incentive and others who do nothing to advance the purposes of the statute. But the proper place for those arguments is in the legislature not the courts, for they turn around fundamental questions of which purposes a society chooses to advance at a particular time.
Or let’s take the argument from the other side. Proponents of flat taxes, like Steven Forbes, argue against progressivity in tax codes – i.e., the principle that the more one earns the greater the tax on each additional dollar -- on both philosophical and economic grounds. They view the redistribution of wealth in a given society as beyond the government’s purview on the grounds that it is unequal or unfair to tax a higher percantage of one person’s income than another’s.
Yet no matter how deeply they believe in this argument -- which coincides almost perfectly with their self-interest – advocates of this view inevitably advance their flat tax in legislatures and not it the courts.
What emerges from the foregoing discussion. First, all tax codes and government outlays are fraught with what can be described as inequities from one perspective or another. Israeli couples in which both spouses work or in which only the wife works, for example, pay far less in taxes than a couple with the same total earnings in which only the husband works. Similarly, there is an element of inequality involved when the government bails out kibbutz debts in the billions but refuses to cover my overdraft in the bank or protects greedy purchasers of bank shares but not investors who thought hi-tech was a bubble that would never burst.
At the same time, it is almost always possible to enunciate some public purpose behind a particular distinction – e.g., encouraging a market for teenage babysitters or providing incentives for women to enter the work force. Citizens will disagree about whether those purposes are indeed worthy of governmental support or justify the distinctions. The place for those disagreements is the legislature.
Finally, two things are rarely equal. Equality is in the eyes of the beholder. Sports facilities are not symphonies; neither are art museums yeshivos.
Subsidies to university students cannot be mechanically compared to those to yeshiva students, for a university and a yeshiva are not the same thing. That is not to say that one is better or worse than the other, or that either is entitled to a certain level of government support, just that they are different.
(While irrelevant to the point I am making, it is worth noting that university students are far more heavily subsidized than are yeshiva students. The actual cost to the university of the education they receive is many times the tuition paid and comes to close to $20,000 per year.)
Chareidi citizens may be infuriated to see their tax dollar subsidize the Batsheva Dance Company to the tune of $15/ticket, and others may be outraged to see their tax dollars support Torah learning. But the first Jewish state in two millenium is entitled to encourage Torah learning, just as it encourages the fine arts. (Even in the United States, in which there is a separation of state and religion, the Supreme Court has upheld property tax exemptions for religious institutions.)
Those who are outraged by government support for dance or yeshiva studies or both should seek redress in the Knesset.
To turn the Court into the arena for resolving these value conflicts, however, is to turn a handful of justices into our masters.
Related Topics: Israeli Supreme Court
receive the latest by email: subscribe to the free jewish media resources mailing list