By: David A. Weisbach*
Abstract
A widely accepted result, associated with Louis Kaplow and Steve Shavell, is that it is more costly to use legal rules to redistribute income than to use the tax and transfer system (the income-tax-only result). An assumption behind this result is that if a legal rule is changed to alter its income-redistributive effects, the tax and transfer system will be adjusted to counteract the effects of those changes on the distribution of income. A number of commentators have questioned this assumption, suggesting that political constraints may limit the ability of the tax and transfer system to adjust to changes in legal rules. They conclude that legal rules should sometimes, or always, be designed to redistribute income. This Article addresses this critique.
It starts by examining whether, in the contemporary United States, the tax and transfer system adjusts as required by the income-tax-only result. The empirical problem is complex because there are many legal changes (often offsetting in their effects on inequality) as well as other changes in the economy in any given period. The tax and transfer system only needs to adjust to the aggregate effects for the income-tax-only result to hold. We do not need to see simple, direct correspondence between a legal change and a tax system change. Notwithstanding the empirical challenge, the evidence is strongly suggestive that the required tax and transfer system adjustments happen.
The Article then assumes to the contrary that the tax and transfer system adjustments do not happen and examines the implications. It argues that even so, we should not use legal rules to redistribute income for three reasons. First, any norm allowing the use of legal rules to redistribute would allow regressive as well as progressive legal rules. Second, if legal rules can be both regressive and progressive and the party controlling the legal system changes hands over time, the redistributive effects of legal rules will offset one another. When there are reversals of this sort, the redistributive effect is the net of the different legal rules while the efficiency costs are the sum of the efficiency costs of the different legal rules. As a result, the efficiency costs may be orders of magnitude higher than the efficiency costs of using the tax system. Finally, current institutions are well structured to design tax and transfer rules that redistribute income, but not for legal rules. Moreover, there are good reasons to believe that the United States will not develop the necessary institutions for designing redistributive legal rules. Combined, these three arguments imply that even if the tax and transfer system failed to adjust, we should still not use legal rules to redistribute income.
* Walter J. Blum Professor, University of Chicago Law School. Email: d-weisbach@uchicago.edu. I thank Michelle Drake, Lee Fennell, Daniel Hemel, Louis Kaplow, Richard McAdams, Alex Raskolnikov, and Steve Shavell for comments.