TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, September 8, 2017

Weekly SSRN Tax Article Review And Roundup

This week, Sloan Speck (Colorado) reviews a new work by Lee Anne Fennell and Richard McAdams (Chicago), Inverted Theories.

Speck (2017)Since the early 1960s, the interdisciplinary turn in legal scholarship has been marked by academic lawyers’ engagement with, and adoption of, theoretical work from economics, anthropology, and philosophy, among other fields. In an important new article, Lee Anne Fennell and Richard McAdams argue for a novel reconsideration of how certain of these theories are deployed by law professors. Specifically, Fennell and McAdams identify a category of theories in which a central (and typically normative) claim “takes center stage,” while implausible or stylized assumptions that qualify this claim are minimized. For this type of theory, the footnotes supersede the headline, but readers are just skimming the large print. Fennell and McAdams argue that we should “turn the spotlight” on these “untrue assumptions” by inverting these theories, putting the footnotes first and downsizing the headline. Doing so will lead to more fruitful inquiry, both in terms of the questions we ask and the answers we find.

For Fennell and McAdams, the prototypical theory ripe for inversion is the renowned Coase Theorem, which, in popular parlance, states that initial legal entitlements don’t affect the efficient allocation of resources, as long as transaction costs are zero. Because the qualification about transaction costs represents the usual (and probably universal) case, initial legal entitlements really do matter. For this reason, Fennell and McAdams recommend reframing the Coase Theorem: If transaction costs are positive, then legal rules have efficiency implications—and these implications should drive our research questions. Indeed, Fennell and McAdams’s reformulation undoubtedly would please Coase, who famously hated the vernacular version of the theorem that bears his name; as he described a putative world of zero transaction costs, “nothing could be further from the truth.”

Drawing from their presentation of the Coase Theorem, Fennell and McAdams develop three features of theories for which inversion is appropriate: “strong and unrealistic critical assumptions,” a “shared popular understanding” that links these assumptions to normative prescriptions, and a fruitful path for future research that emerges when these assumptions are challenged directly. Furthermore, Fennell and McAdams provide four examples that illustrate the power of these types of inversions. From their perspective, Robert Nozick’s entitlement theory of distributive justice sheds light on what values underlie redistribution (and serves as a challenge to welfarist approaches to law); Tiebout’s theory of public services and jurisdictional sorting highlights political and social barriers to mobility; Kaplow and Shavell’s theory that nontax legal rules should maximize efficiency—leaving taxation to address distributional concerns—reveals that political economy and institutions create wedges that affect policy instruments differently (raising the broader question of whether inversions work for all double distortion arguments); and the prisoner’s dilemma shows that real-world cooperation frequently is possible, while uniformly beneficial legal interventions are rare. Fennell and McAdams conclude by sketching alternatives to inversions as a remedy for poorly stated theories, as well as some limitations to inversions.

In the final portion of their article, Fennell and McAdams allude to the question of why the marketplace of ideas sometimes expresses theories in less-productive or counterproductive forms (and they suggest several possible answers). For me, this question warrants further exploration. One could argue that the need for inverted theories is unique to law, or, at least, uniquely expressed in the field of law. Acclaimed legal scholarship not only asks major questions and fills important gaps in the literature, but it also often has a “man bites dog” quality. Lawyers prize the contrarian and clever. And, as any rising 2L knows, both sides of any issue can be argued with equal aplomb. Perhaps these notions encourage glib appropriation of other fields’ theoretical infrastructure to serve existing ideological agendas, leaving nuance behind. If so, are inverted theories merely a fresh arrangement of the deck chairs, rather than a recognition of the larger problems that lurk below the waves? Or do inverted theories offer something more systemic, a series of subtle course corrections that could help us avoid intellectual icebergs entirely?

Relatedly, Fennell and McAdams’s article left me wondering whether inverted theories represent one species of a larger class of reframings that could help legal scholars better engage in cross-disciplinary work. For example, Fennell and McAdams cite the Laffer Curve as a theory that might not be susceptible to inversion. But the Laffer Curve does drive home the point that to raise a dollar of non-Pigouvian tax revenue costs more than a dollar, and to give back a dollar of such tax revenue yields more than a dollar, if private costs are taken into account. Setting aside the political hagiography associated with Laffer’s napkin, the Curve emphasizes that distributional considerations must be more persuasive as tax rates rise. Similarly, the “new view” of dividend taxation may not require inversion (that is, foregrounding the assumptions of existing corporate equity and constant tax rates over time), but the scholarly juxtaposition of the old view and the new view may prove profitable by illuminating aspects of financial markets, investor expectations, and intersections between taxation and corporate law. Perhaps the terminological recognition of changing ideas (see Old Harberger, New Harberger) serves as a check on superficial treatments of complex theories. The intellectual structure of legal scholarship begs for further analysis, and Fennell and McAdams provide a compelling starting point.

Finally, Fennell and McAdams make an indirect case for re-reading the canon, and re-reading it closely. There still are ideas to be mined. For example, Coase’s The Problem of Social Cost stands as a careful discussion of when to rely on private markets, when to regulate, and when to tax (especially when contrasted with Pigou’s late-career cynicism about the last instrument). Regular treatment at this level of detail would enrich scholarly discourse. For academics inside and outside of tax, Fennell and McAdams’s article will provoke both a rethinking of how legal scholars represent theoretical concepts and a return to the foundational texts that give rise to these understandings.

Here’s the rest of this week’s SSRN Tax Roundup:

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