Taxing Subjective Value: Floors as a Response to Heterogeneity

Abstract

This Article takes a fresh look at the problem of taxpayer heterogeneity—how the same good or service can have very different value depending on who receives it. This issue is well known in the fringe benefits context. Every tax student wrestles with Benaglia, trying to figure out how much income someone receives from free room and board. But the problem goes far beyond fringe benefits. It also shows up when a parent loans money to a child, when luxury brands offer employee discounts, or when tech workers receive stock options. These examples come from separate corners of the tax literature, but they all point to the same underlying issue: income is hard to measure when value varies by taxpayer. Taxpayers vary not just in their consumption preferences, but also in their creditworthiness, likelihood to switch jobs, and other characteristics that affect the accurate measurement of income. This Article makes two main contributions. First, it identifies taxpayer heterogeneity as a cross-cutting problem that links many of tax law’s toughest income measurement questions. Although each area has been studied separately, prior scholarship hasn’t connected them through the common thread of heterogeneity. Recognizing that connection opens the door to broader insights and more unified solutions. Second, the Article explores a practical and intuitive way to deal with this problem: focusing on setting floor valuation using minimum benefits. Many goods or services provide at least a baseline value to any taxpayer. The tax code already hints at this approach in a few places but fails to make the floor explicit. This Article shows how building minimum benefit “floors” into the law can improve both the accuracy and the fairness of the income tax—while also making the rules simpler to administer.