William & Mary Bill of Rights Journal
Abstract
This Article explores economic, philosophical, and legal relationships between economic inequality and market failure, and it draws on these linkages to develop an innovative normative justification and alternative constitutional basis for a levy on wealth.
The Article’s central analytic result is that several general mechanisms responsible for common market failures can also systematically produce economic inequalities whenever preferences against extreme inequality are fairly widespread. Because these mechanisms satisfy both the ‘process-based’ and ‘outcome-based’ criteria of market failure, redistributive transfers designed to reduce these inequalities would be normatively justified under the widely accepted market failure theory of government action. On this view, the remediation of market failure is generally a sufficient condition for government intervention in the economic sphere.
The institutional and constitutional implications of this ‘market failure theory of inequality’ are then elicited. At the level of policy, this Article advocates for a bifurcated tax-and-transfer system, in which (i) a levy on wealth is employed to reduce inequalities attributable to (both ‘local' and ‘global’) market failures, while (ii) income or consumption taxes are utilized to address inequalities that are not the product of market failure.
If this institutional division of labor were adopted, the Commerce Clause of the U.S. Constitution would then license the enactment of a ‘market-failure-correcting wealth exaction,’ as Congress’s commerce power accords it broad authority to legislate to remedy market failures. This fiscal imposition could be characterized in a way that avoids the constitutional prohibition on unapportioned ‘direct taxes,’ widely believed to be fatal to the implementation of a wealth tax. In this way, the total quantity of constitutionally permissible redistribution would be maximized.