The Structure of Tax Revolutions

The title of this post is based on Thomas Kuhn’s The Structure of Scientific Revolutions. Kuhn’s classic work explores scientific achievements to show how scientific knowledge has progressed over the years. Kuhn’s framework for examining the progression of scientific knowledge provides a useful way of viewing our tax laws, how they came about, and where they might go in the future.

In general, Kuhn proposes that scientific disciplines arise out of individual solutions to particular problems. Solutions to similarly situated problems are identified as being related and are grouped together. This grouping allows individuals to apply lessons learned from one problem to help solve other problems. Eventually enough of the problems and solutions are grouped together to form a body of knowledge worthy of academic study. At that point one or more all-encompassing textbooks appear. Students coming into the study of this new academic discipline are able to use the textbook’s paradigm to gain a quick in-depth knowledge of the subject. Not having to spend as much time figuring out the basics, the new students are quickly able to advance the new academic discipline. More and more problems are resolved as the discipline matures. The new problems and solutions are added to the textbook paradigm and are mastered by the newest students.

The students who came into being under the textbook paradigm spend their professional lives toiling under the framework provided by the paradigm. Eventually the professionals become committed to the paradigm for their survival. They reject major attempts to rewrite the textbook paradigm, preferring only to refine the paradigm. The professionals come to see the textbook paradigm as an end instead of a means to an end. Professionals believe that if a problem can not be solved it is not because a failure of the paradigm, it is because the paradigm just yet to be applied properly to the problem. At that point the academic paradigm becomes highly technical and not wholly useful. Refinements on top of refinements on top of refinements result a body of knowledge that even the most sophisticated computers can not fully manage. The textbook paradigm starts to break down. Specific problems arise that the textbook paradigm cannot adequately address. Newer practitioners and progressive thinkers start addressing the unresolved problems by applying pre-paradigm logic. The pre-paradigm logic gains in popularity and it becomes the subject of study. Eventually the old paradigm is discarded and the new one is put into place — a scientific revolution has occurred. The process then begins anew.

Kuhn’s paradigm very aptly describes the progression of our tax laws. Our tax laws have their history in the now humorous one page tax return and its accompanying pamphlet (that was the Internal Revenue Code). From that base the old code sections grew more verbose and new code sections were added as the government became aware of taxpayers circumventing the rules (i.e., problems were identified and solved). Simultaneously a body of administrative and judicial tax law developed (see http://www.irstaxtrouble.com/tax_law.php for an overview of our tax laws). As this body of tax law developed, several seminal tax law textbooks appeared. Tax law became a well-established field of academic study. The students of this textbook paradigm became the practitioners who sought to continually refine the paradigm. Our tax laws were revised several times, with the Internal Revenue Code undergoing major revisions in 1939, 1954, and 1986. Enough problems were solved that it justified the creation of newer textbooks (tax practitioners recognize books by authors such as Bittker, Eustice, McKee, and others). The tax law began focusing on very technical and specialized problems. This is where our tax laws are today.

So what does today’s textbook paradigm look like? What paradigm are tax students being taught and under what paradigm are tax practitioners toiling? In general, the current paradigm is based on taxes being levied on earned income, income inherent in transferred property, and value inherent in transferred property. Tax practitioners today (myself included) view tax problems in terms of taxable gain. Thus tax practitioners spend their days looking for ways to:

Avoid or defer recognition of income,
Recognize and accelerate all permissible deductions,
Characterize transactions as capital or ordinary for income and deduction purposes, and
Recognize all applicable credits.

These four seemingly simple tenets make up today’s tax paradigm. They they consume almost all (if not all) of the tax practitioners talents and mental energy throughout his or her professional career.

But this paradigm has proven ineffective in addressing several problems. Some of these problems involve the inability to collect taxes and the inability for the paradigm to work effectively in an international economy (one only has to look at the problems with old Section 114 and new Section 199 to see how this has been playing out). As problems such as these increase in importance, newer and more progressive tax practitioners have begun discussing new tax regimes, such as consumption-based and value-added tax regimes. We are now at a point where these types of tax regimes are considered worthy of study (which they were not just two decades ago).

If Kuhn’s theory is correct, and it is applicable to our tax laws, then it appears that we might be nearing a tax revolution — a tax revolution that will result in a new consumption-based tax regime.