Law and the New Dynamic Public Finance

In recent years, economists working in public finance and related fields have applied a new set of models and methodologies to the problems of inequality and economic insecurity. This innovative approach—often known as “the new dynamic public finance”—emphasizes the challenges posed by productivity changes across the life cycle and policy changes over time. The new dynamic public finance has generated important insights that often cut against the conventional wisdom in classical optimal tax theory, suggesting—for example—that capital income should be taxed and that higher capital income taxes can incentivize investment under certain circumstances. Mainstream economics has assimilated many of these insights, but with fleetingly few exceptions, legal scholars have yet to engage with the new dynamic public finance literature.

This article explores the potential for cross-pollination between law and the new dynamic public finance. It explains the central intuitions underlying dynamic tax models and draws out implications for tax and other areas of law. The new dynamic public finance offers compelling reasons to adopt age-dependent tax schedules, generates novel justifications for the taxation of capital, and provides an original argument for applying different tax rates to single individuals and married couples. It also reveals flaws in the federal taxation of retirement savings and—in particular—raises serious doubts about the wisdom of the traditional IRA and 401(k) structures. Beyond the Internal Revenue Code, the new dynamic public finance literature offers fresh perspectives on the design of disability and unemployment insurance programs, the rationale for tort law, the regulation of cryptocurrency, and the application of the Constitution’s procedural due process requirements, among other subjects. Ultimately, incorporating a new dynamic public finance perspective into tax and non-tax law can inform the crafting of a more comprehensive system of social insurance while enriching our understanding of the system we now have.