“Think About the Why of Spending Before the How of Paying” and Remember, “Luck Has a Lot to Do With It” – Ed Kleinbard’s Legacy

 

This is not an obituary, at least it is not meant to be.  However, I suppose it could be.

Ed Kleinbard is one of the most profound, straightforward and intellectually honest “thinkers” in taxation of his and our time – and I would say, given his experience with advising on, crafting and commenting on the law with undoubted accountability and responsibility at every juncture of his career, of any time. He died last week, far too young and early by any standard. His moral conscience as a fiscal thinker and tax practitioner – which is or should be our moral conscience too – will continue to personify the soul and mind whose physical presence we will not encounter again.

The words within quotation marks in the title are not his words as such, but they reflect his abiding admonition to us. First, as one of few among us, he knew that policy - what tax revenue is spent on and why it is collected - matters more than the abstractions of taxation that preoccupy most in the tax field, in such mundane ways, for most of their careers. Second, he knew that no matter how self-determined we think we are as individuals or collections, including institutionalized collections of individuals, our successes for those who experience them are necessarily and significantly affected by the luck of their circumstances and equally – well, quite unequally actually -  the vulnerability and struggles of others, too, is significantly affected by their (bad) luck, bad luck that just as easily and fortuitously could have been the luck of the materially successful who pride themselves on self-reliance that really is never entirely or truly of the self.

Ed was a philosopher of sorts, though he abjured philosophy and its language – I think he would say jargon – as ends in themselves, rather than possibly a manifestation of imperatives that underlie fiscal policy that may, at least partly, be enabled by tax policy and tax legislation. The three are not the same, and as Ed knew and wrote they ought not to be conflated. Nor should ignorance of any of them and their complementary roles be an excuse for tax rhetoric that fails to appreciate why we tax and therefore the reasonable limits but also targeted objectives of taxation.

Most uncommonly, Ed was among the few thinkers in the tax world whose expansive and honourable though still highly rigorous observations and analysis were built on actual experience applying and being accountable to clients and tax authorities for applying the tax law, and then being involved in policy and legislative development at the very highest degrees of the U.S. government before “retiring” to academia where the cocktail of his intense interest in taxation as an outgrowth of social mores and objectives housed by tax policy took some of its most penetrating turns. Being accountable that way, for real outcomes of changes in persons’ behavior and the legal context which reset on one’s advice, tends to focus and sharpen the mind, revealing nuances and all too frequent sophistry in tax policy that through no fault of their own would elude other students of taxation. That was the case with Ed.

Others have lauded him (for example, the Wall Street Journal); my comments are by way of introduction for what follows – which is an example of Ed living on despite mortality. I make these comments because we would do well to think about them as we try to appreciate the social context served by taxation, not a discipline in itself but a servant of fiscal objectives subject to fiscal constraints and discipline. We would do well to think about them when tax avoidance cases raise the specter of taxation as some sort of non-zero-sum game. We would do well to think about them when we contemplate the responsibility with which tax students are entrusted to inquire into how civil society, on which we all depend as “inputs” in our lives, can be well and fairly served as collective consumption for which we pay together via taxes.

Consumption in this context includes the reliance by commercial enterprises on the context in which they conduct operations and make and sell products and services to an intelligent and financially-able marketplace. All of what goes into the many assumptions embedded in that last statement are “inputs” just as much as those bought in a typical fashion as tangible inputs, services and labour in a commercial setting. We pay for those kinds of inputs, and we must pay for the inputs we collectively consume but too often take for granted as being different.

Ed Kleinbard reminds us that the spending side of taxation is profoundly important. It also follows the direction of a moral compass that requires self-effacing behavior by all of us, in the interest of ultimately our “least able” as the benchmark for what is decent. That said, he also reminds us that there are efficiency and related judgments to be made to determine who is best placed to satisfy public needs nevertheless according to suitable living standards. But the point is, spending is the control variable for taxation and tax policy; it is not the other way around.

Using a metaphor that is mine, Ed Kleinbard reminds me that the intersection of fiscal and tax policy is not a lot different than grocery shopping. We do not assemble the money for the shopping trip until we have a shopping list – what it is we want to buy. When we make the list, we draw on our awareness of the limits of our financial resources and, depending on our wants, may reallocate amounts budgeted for other things to enable the shopping trip on which we are embarking. We also recognize that whatever our financial resources, there are absolute limits to what we can and may consume, and we adjust our family lives accordingly (we “budget” or our circumstances do that for us) – or at least we should – and if we do not, and we over-extend ourselves, this eventually catches up with us. Our consumption and financial priorities and resources take account generations within the family and the stages at which members of those generations, for example children being educated, are in the matrix of family priorities. We value, not merely in the sense of respect but in a financial sense, if only by our behavior we value, the contributions made by all members of the family unit in relation to each other and based on their capacities the demands we make on each other to “fund the family nation”.

The collectivity that is the citizenry, including persons enlivened only by the law which are not natural persons, is that family, and the exercise of assembling financial resources purposefully to fund collective consumption. Actual and proposed spending matters. Equally, it matters how we spend, and whether we spend on institutionalized modalities of consumption or we engage outsiders, privately, to satisfy consumption needs. That is the same thing we do in the family unity. It is in the nature of government to rationalize the needs and wants of all of these “families” (however we define them) qua “nations” in order to establish common and decent standards according to which we all may live, and then to pool our resources to pay for livelihoods consonant with them.

Ed Kleinbard was eloquent about the significance of spending - that the “fiscal side” acts as a manifestation of social and economic priorities of a country, and taxation. Some of the thoughts he expressed in his seminal book on this subject “WE ARE BETTER THAN THIS HOW GOVERNMENT SHOULD SPEND OUR MONEY” (Oxford University Press, 2015), as a relatively newly minted full-time tax professor, bear consideration and reflection. Inevitably, Kleinbard’s analysis reflects the U.S. political, social and economic experience, but the attention he draws to the primary significance of fiscal policy – spending – is not constrained by that context of his own immediate experience as a U.S citizen.

In the Introduction to this book, Kleinbard reminds us that taxation is not merely an exercise in solving interesting puzzles. It does not exist for its own sake. It is purposeful. And, I would say that its purposes, informed by a careful consideration of its fiscal underpinnings, is what our familiar “text, context and purpose” GAAR (General Anti-Avoidance Rule) mantra has in mind, as the Supreme Court, in the Canada Trustco ([2005] 2 S.C.R. 601) and Kaulius (Mathew, [2005] 2 S.C.R. 643) cases called on us to look within the Income Tax Act to discover the role and scope of its particular provisions.

Kleinbard wrote with typical intellectual honesty:

Tax policy is the handmaiden, and spending policy the sovereign: we need to decide on what projects to embark collectively through the intermediation of government before we can design a tax system to meet those needs. Our greatest public finance policy mistake over the last few decades have been to obsess over tax policy, while simultaneously failing to have serious and rational debates over spending policy. We quibble over tactics without really engaged in the more difficult enterprise of forging a national consensus on our strategic objectives… It is also a confession by a longtime tax geek that I, like many others, have elevated tactical issues of tax system design beyond their ultimate importance to our society. Instead of arguing about tax rates or even levels of tax revenues in the abstract, we must focus instead on the real question, which is what we think our government is good for.

How familiar does this sound? “Tax people” tend to be consumed with the arcana and navigation of tax “rules” without nearly enough reflection on the social condition for which those “rules” are simply an expression. This is not to suggest that the interpretation and application of the law is sociological or political, as such, in the nature of a quest for extra-legal “substance” despite how fiscal policy has been enabled by tax policy and executed by tax legislation. We do operate, and cannot otherwise exist, without a legal system. But it does remind us that the moment we apply qualifications like “technical” and “technically” to a tax analysis or fuss hopefully about the elasticity of tax “rules” that should be able to resist the hoped for elasticity, we may be on the wrong track.

The connection between societal experience and values, which become manifest in fiscal policy before the word “tax” even creeps into the conversation, was the platform from which analyses of collective consumption – going to the grocery store together with a shared wallet and a common but specific grocery list. Again, Ed Kleinbard is as articulate as one could possibly be about this, and again his words bear repeating:

Fiscal policy recommendations in the end always are normative – they embody a point of view about our values, our relationships to each other, and what those values and relationships should be. Spending may be the sovereign and tax policy the handmaiden, but what we choose to spend on is determined by our values and belief systems. And these in turn should be discussed more directly than they usually are, even by those of us whose inclinations ten more toward action than rumination. … [F]iscal policy recommendations rest on a foundation of moral philosophy:  the only question is whether we are conscious of that fact…

Rounding out Ed Kleinbard’s views about the pre-eminence of fiscal policy and spending - as well as his views necessarily tethered to how we, as and within a country and as a country within the larger international community - is his concession to the luck of the draw. With customary unvarnished directness, Kleinbard’s success and material self-reliance are not merely attributable to personal industry and good living. Luck is important; luck in significant part, even allowing for good, diligent and responsible living, has a lot to do with whether virtues of this kind are moderate to the vicissitudes of a life otherwise comfortably lived, and put the boots to notions that somehow the vulnerable are responsible for their own condition – and that the rest of us, acting as a community, don’t have the obligation to lend a hand, to reach out, to do what our parents and kindergarten teachers impressed on us to be sharing.

Again, Ed Kleinbard connects luck and fiscal policy, even both considering the enablers, tax policy and tax legislation:

… I see the pervasive hand of fortune – of simple luck – at work everywhere. I am very industrious, and I have achieved some success and material comforts, but I could fill a book longer than this one with all the good fortune that has come my way, starting with my native intelligence. Those who ascribe  everything they are and have achieved to their “native” talents, and who view with derision those who have not achieved comparable success in the world, not only willfully overlook the good luck that has come their way, but more fundamentally fail to consider why it is they are blessed with those congenital qualities that the world rewards. Their fiscal thinking – usually articulated as a confusion of personal financial freedom with a society’s political freedoms – ultimately rests on thinly veiled narcissism, or the embrace of a cartoon version of Calvinist predestination. Both are distasteful and un-American.

He could have stopped at distasteful; its not a geographic or political-geographic or constitutional view he was expressing.

Certainly Ed Kleinbard had his own views about the balance of government intermediation to do things we can’t do for ourselves efficiently, fairly and decently, versus private enterprise nevertheless to achieve outcomes consonant with civilized society. But the point is that he articulated their essential parameters and in so doing explained why knowing where one is going and why, whether to institutionalize the trappings of that civilized society and the “values” that underpin it or to go grocery shopping, come before the mechanics, even complicated mechanics, of how. What we spend and why we spend it, in short fiscal policy, comes before tax policy and its progeny tax legislation.

It is interesting, as a timely aside, to reflect on the Kleinbard legacy in light of how governments are responding to the COVID pandemic with significant intervention no doubt to ensure that as few vulnerable people as possible lose their footing and prospects, whether and how the immediate intervention yields longer term and lasting fiscal benefits, how ad hoc though no less valuable responses might be melded into more comprehensive policies dealing with income support and the like, and, ultimately, how we “pay it all back” or whether this necessarily is even a meaningful question.

Perhaps Ed Kleinbard’ s parting legacy to us – no, this is still not an obituary – is to equip us with the basic tools to regenerate our social and economic conditions, and the perspective and self-consciousness that ought to govern their wise use. And lest the practical exigencies of day-to-day tax practice seem to take a back seat, not so because the same tools, perspective and self-consciousness ought to determine how we develop and then intelligently and thoughtfully apply the tax law we have. There is not a difference.

 

Scott Wilkie

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