Brian D. Galle (Florida State) presents Fairness and Federalism in Taxation today at Florida State as part of its Faculty Enrichment Speaker Series.  Here is the abstract:

This paper posits that, at least in a tax system in which the concept of income is defined with relation to welfare (as opposed to ability to pay) it is likely impossible to make strong horizontal equity claims about the relative tax treatment of otherwise similar taxpayers in different states or different nations. For example, the internal-to-tax rationale for section 164 of the U.S. Tax Code (the deduction for state and local taxes) is that deductibility is required to treat fairly taxpayers with similar incomes but different tax burdens. Relatedly, the internal-to-tax logic of the U.S. foreign tax credit appears to be that taxpayers who have given part of their income to another sovereign are less well off than other taxpayers who have not. These claims, I argue, cannot be substantiated. Among other problems, an accurate assessment of taxpayer "welfare" would demand that the taxing jurisdiction make an evaluation of the beneficial effects taxpayers realize from the system of taxation imposed by the other sovereign, including a judgment about how and when to evaluate transfer payments. Thus, any effort to assess horizontal equity runs up against the view (admittedly, external to tax) that such an evaluation is inconsistent with the premise of sovereignty and self-determination for each state. I conclude by observing that by setting aside horizontal equity, we can focus more closely on other, in my view more significant, considerations for setting tax policies that influence the relations between sovereigns. For example, there might be serious vertical equity implications of an international tax regime in which mutual tax crediting exists, not as a matter of internal tax policy, but as the result of bargaining.