Seto Reviews Liscow's Is Efficiency Biased?

Theodore Seto (Loyola-L.A.), A Challenge to Optimal Tax Orthodoxy (JOTWELL) (reviewing Zachary Liscow (Yale), Is Efficiency Biased?, 85 U. Chi. L. Rev. ___ (2018) (also reviewed by David Gamage (Indiana)):

In “Is Efficiency Biased?,” Zachary Liscow explores the canonic optimal tax claim—sometimes known as the “double distortion premise”—that non-tax rules should be structured efficiently, without regard to distributional consequences, and that tax and transfer rules should then be used to offset any resulting negative distributional consequences and make such further distributional adjustments as are necessary to maximize aggregate social welfare. This standard claim assumes that “if the tax system achieves the appropriate distribution of income, then the distributive impacts of non-tax policies do not matter.” Ultimately, claim proponents conclude, “everyone can be made better off through efficient non-tax policies, plus taxes and transfers.” ...

Liscow asks the reader to consider a different possibility: that for a variety of reasons the tax system may not actually achieve an optimal distribution of income. If so, Liscow notes, then policies consistent with the double distortion premise will not maximize aggregate social welfare—indeed, they may produce markedly suboptimal results. Part of the problem, he observes, is that efficient non-tax policies are not generally “legal entitlement neutral”—that is, equally likely to favor rich and poor. This follows from the fact that Kaldor-Hicks efficiency “measures the willingness to pay of the parties affected by a policy and then chooses the policy that maximizes the sum of the willingness to pay of those parties” and that the wealthy tend to be willing to pay more for public goods and other legal entitlements. ...

Liscow concludes: “[E]conomic analysis of law has long been guided by the assumption that the distributive consequences of policies do not matter, since taxes should respond to take care of distributive considerations. But there is little evidence that taxes in fact do respond….E]fficient policies systematically tend to distribute legal entitlements to the rich, exacerbating income inequalities and possibly leading to multiplication over time. At a time of rising income inequalities and growing concern with these inequalities,…it is time to consider adopting policies that reduce efficiency but have fairer distributional outcomes, at least in some circumstances….[T]his article suggests the importance of considering context in deciding whether to deviate from the efficient rule….For efficient rich-biased rules with distributional consequences that are sticky [e.g., not offset by taxes or transfers],…policymakers should adopt explicitly inefficient rules that treat the rich and the poor alike.”

The most important implications of Liscow’s argument, as suggested by the paper’s own conclusion, might appear to relate primarily to non-tax law, not to tax policy. But the paper carries important implications for tax policy as well.