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Monday, November 28, 2005

Blumkin & Margalioth on The Limits of Redistributive Taxation: Establishing a Case for Equity-Informed Legal Rules

BlumkinMargo Tomer Blumkin (Ben-Gurion University, Department of Economics) & Yoram Margalioth (Tel Aviv University Law School) have published On the Limits of Redistributive Taxation: Establishing a Case for Equity-Informed Legal Rules, 25 Va. Tax Rev. 1 (2005).  Here is the Introduction:

That "redistribution is accomplished more efficiently through the income tax system than through the use of legal rules" seems to be the prevailing norm in the law and economics literature, which finds it "appropriate for economic analysis of legal rules to focus on efficiency and to ignore the distribution of income in offering normative judgments." Considerations other than efficiency are usually discussed in this literature only in the context of the broader question of what criteria ought to guide social decision-making, implying that "distributive justice is a subject unto itself."

This paper questions the prevailing norm regarding the means of redistribution, namely, the "division of labor" between legal rules and the tax and transfer system. Should redistribution be carried out only through the tax and transfer system, or should redistributive legal rules play a role as well? We extend the framework used in earlier literature on the issue, incorporating new considerations that should be taken into account regarding redistribution. We show that redistributive legal rules may be justified, providing examples that lie at the core of contemporary public discourse.

Our first argument is that the administrative and compliance costs of the tax system need to be taken into account. While Kaplow and Shavell consider the labor/leisure distortion to be the only cost entailed by using the tax and transfer system as a means for redistribution, empirical evidence indicates that administrative and compliance costs account for the bulk of the deadweight loss associated with the tax system. Similar costs may not necessarily be incurred by redistributive legal rules.

Our second argument concerns cases in which people may have preferences for the means of redistribution which may have intrinsic value for them. This imposes "moral" constraints on the tax system and calls for the use of redistributive legal rules. We illustrate the argument through an example of labor market discrimination.

Our last argument concerns cases in which inequities are entailed by efficient legal rules. We will use the case of "profiling policy" to illustrate an extreme inequality created by a perfectly efficient legal rule, which justifies a shift to a less efficient rule rather than compensating for the inequality through the tax and transfer system.

The structure of this paper is as follows: Part II provides a concise critical review of the key contributions to the tax versus legal rules literature. Kaplow and Shavell based their argument on a standard set of qualifications, relying on economic literature that dismissed the use of commodity taxation in the presence of an optimal income tax. They drew an analogy between legal rules and commodity taxation, implicitly adding an insight that the tax system does not have to be optimal for legal rules to be redundant. In Part III we attempt to contribute to the existing literature on tax versus legal rules, by clarifying the qualifications in the economic literature on which Kaplow and Shavell have relied, and discuss the qualifications' applicability in the context of legal rules. In the Parts that follow, we provide three new arguments supporting the use of redistributive legal rules and a conclusion.

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