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MURPHY - CATALYST FOR REFORM, OR JUDICIAL POWER GRAB?

August 31, 2006

As word on the Murphy decision seeps out of the tax world into the mainstream media, a new set of reactions begins to emerge. As one might expect, the reaction outside of the tax community is different to that of us tax drones, and it reflects their philosophical approach to taxes.

Bruce Bartlett, writing in National Review online, sees it as a step towards a national consumption tax:

I would like to see the court go further in regards to the question of whether interest constitutes income. To economists, some portion of the interest we receive on our savings is merely compensation for loss — loss of the immediate enjoyment we would receive if we consumed our income today instead of saving it.

The New York Sun editorial page says:

Time and a higher court will tell whether Ms. Murphy gets to keep her $20,665 in tax payments. We wish her luck. Whatever the final result, Ms. Murphy has performed a service by offering three judges an opportunity to give the IRS a scare. No other person or institution in America is above the law, and there's no reason the IRS should be the exception.

While I am sympathetic to these sentiments, these folks miss the bigger picture. The Constitution allocates the taxing power, and the legislative power, to Congress, subject only to a requirement that "direct" taxes be apportioned among the states according to population. The courts tended to use the "apportionment" requirement to assert themselves in tax policy until the 16th amendment was passed, removing the issue of whether taxes on income were "direct" taxes. Since then, the courts have wisely deferred to the elected branches in determining how the taxing power is to be exercised.

It is unwise to invite the judiciary back to the tax policy table. These folks may be cheered by a judicial meddling in tax policy that they endorse, but not all judges are conservative, and they won't all meddle in ways that the Sun or Mr. Bartlett would approve.

The traditional role of the courts in tax policy is to hold the executive branch - the IRS - accountable to the law as enacted. There have been any number of decisions overturning the IRS on this score. Murphy doesn't "scare" the IRS. It scares Congress itself by subjecting their policy choices to black-robed second-guessing.

The Murphy decision, if upheld, will make it impossible for legislators to make tax policy with any certainty that it will pass muster with the judges that then happen to be on the bench. Better for the courts to step back from the brink and let tax policy arguments take place in the branches directly accountable to the tax-paying voters.

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