Ilan Benshalom (Hebrew University) & Kendra Stead (J.D. 2011, Northwestern) have published Values and (Market) Valuations: A Critique of the Endowment Tax Consensus, 104 Nw. U. L. Rev. 1511 (2010). Here is the abstract:

Should we tax people on their actual earnings or on their capacity to earn? In the last thirty years there is a consensus among tax professors that taxing individual capacity, or endowment, offers a more comprehensive, equitable and efficient alternative to the income tax. Endowment taxation contradicts our political reality and moral intuitions, but tax scholarship supporting it never had to confront these issues because it assumed that endowment is not observable. Recently, however, three of the country’s leading public finance and tax scholars, show that certain aspects of earning capacity are indeed observable. This observation is likely to significantly increase as scientific advancement allow us to better collect and analyze data about genetics and earning patterns. Building on the consensus in the literature over the desirability of an endowment tax, these articles force tax theory to a fork in the road—either integrate the endowment tax into current tax arrangements; or explain why this consensus is wrong.

This Article argues the consensus is wrong, because it assigns the market price signal inappropriate weight within a liberal democratic political framework. Markets represent the aggregated preferences of other people, and gain their credibility because they represent voluntary transaction. Embracing the market price to assess earning capacity, in a non-voluntary coercive setting is therefore analytically flawed. It further demonstrates that the endowment tax promotes an ex-ante form of redistribution which is unattractive from a liberal egalitarian perspective. The impact of these conclusions reaches beyond the tax debate. The endowment tax agenda and its popularity represents a symptom for the expanding role of efficiency consideration within legal discourse. By challenging the endowment tax debate, the article wishes to open a broader debate about the role of efficiency considerations within the scope of our political conventions.