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Abstract:
This Report considers the constitutionality of the common state practice of exempting interest on the state's own municipal bonds from taxation but imposing tax on municipal bonds issued in other states. In particular, we weigh the impact of a recent Supreme Court decision, United Haulers, on challenges to those statutes, including one suit, Davis v. Kentucky, in which a petition for certiorari was recently granted.

In United Haulers the Court held that a municipal ordinance didn't violate the Dormant Commerce Clause because the ordinance operated as a preference for a government-owned facility. United Haulers might save from constitutional invalidity state tax laws favoring in-state municipal bonds, but we doubt it. Although United Haulers lifts the presumption of unconstitutionality from laws favoring state-run businesses in competition with private business, we argue that the Court should remain skeptical of discriminatory laws that shield state officials from the pressure of competition with activities undertaken by other states. We predict that, if constitutional law remains as it stands, state laws exempting only in-state municipal bonds will be found to violate the Dormant Commerce Clause. If we are wrong and state tax laws favoring in-state municipal bonds are shielded by United Haulers, it will mark a significant extension of the nascent state-run business exception to the Dormant Commerce Clause.

dormant commerce clause, municipal bonds, market participation, state and local tax

Abstract:
This Article argues that, contrary to the consensus of economists and many legal scholars, the norm of 'horizontal equity' in taxation has independent meaning as a default rule in favor of existing arrangements. Although it has long been said, and widely thought, that tax should be fair in its dealings with individuals who are situated similarly to one another, no one has been able to say convincingly just what that fairness comprises. As a result, the learned referees in the last major dispute over the significance of horizontal equity judged that fairness's critic had decidedly won the day. Since then, there have been ever more critics, but no cogent, comprehensive defense.

My defense is both theoretical and practical. First, I argue that horizontal equity is a special aspect of the revenue function in taxation. Because it enshrines the status quo before enactment of a new tax law, horizontal equity can be reconceived as a commitment by the authors of tax legislation to honor the past and future policy choices of others, with whom they are jointly engaged in a project of deliberative democracy. Alternately, horizontal equity may be justified by welfare gains from a shared agreement to leave certain controversial questions of distributive justice undecided during the revenue-raising process. Both of these rationales leave open - indeed, they clear the air for - arguments about the ultimate ends law, and tax law in particular, should serve in society.

tax, horizontal equity, ability to pay, distributive justice, welfare economics

Abstract:
The idea of hidden taxes is as old as John Stuart Mill, but convincing evidence of their existence is new. In this Article, I survey and critique recent studies that claim to show that there are some taxes that can go unnoticed by those who pay them. I also develop the array of unanswered theoretical questions and policy implications that potentially follow from the studies' results.

Probably the central question for hidden taxes is whether they might enable government to raise revenue without also distorting the economy. If so, I argue, they have the potential to radically refashion the architecture of redistributive government. But, as I also show, whether that is true turns on the cognitive mechanisms that might permit taxes to go unnoticed. For example, if hidden taxes are caused not by rational ignorance but by cognitive shortcomings, then it is likely that the burden of a hidden tax will be borne disproportionately by poorer taxpayers, and vice-versa. Thus, I attempt to integrate with the tax literature some recent developments in our understanding of bounded rationality in consumers more generally.

[This version revises and substantially extends the earlier working paper, "Do Hidden Taxes Increase Welfare?"]

taxation, optimal taxation, behavioral law and economics, bounded rationality, hidden taxes, tax salience, redistribution, cognitive bias, debiasing

Abstract:
This Article responds to an important recent essay in the Columbia Law Review by Marvin Chirelstein and Larry Zelenak. Chirelstein and Zelenak propose a dramatic change in tactics in the way that the government attempts to combat tax shelters - that is, efforts by corporations and high-earning individuals to avoid tax by clever manipulations of the technical terms of the Tax Code. For the past seventy years or so, the IRS has responded to these manipulations by urging courts to read the tax statutes purposively, rather than literally, and thus to deny favorable tax treatment to business transactions entered into with no real business purpose or economic substance. However, as textualism has grown in influence, the IRS's purposivist entreaties have diminished in effectiveness. Chirelstein and Zelenak propose to respond to this problem by doing away with the notion of business purpose and economic substance and instead enacting a pair of bright-line rules that would make rather more difficult some of the most popular shelters.

My claim in this Article is that the Chirelstein/Zelenak approach reaches a bit farther than it needs to, but that it contains some very important elements that are worth preserving. In particular, I argue that Chirelstein and Zelenak seem to assume that there is no principled argument we could present to textualist judges to convince them to analyze a transaction for economic substance. I respond by analyzing various strands of textualist theory to demonstrate that, in fact, Congress could likely resolve many textualist objections with a carefully crafted statute. However, I also respond to other commentators who have assumed that there are no constitutional limits on Congress's power to command textualists to apply economic substance analysis. That argument overlooks the constitutional roots of many textualist theories. I thus offer, I believe for the first time, an analysis of whether Congress can constitutionally displace certain textualist interpretative methods by statute.

The Article then applies these insights to suggest a fairly radical re-shaping of the meaning of economic substance, although one that draws on earlier work by others. I argue that Congress ought to enact a statute that would prohibit favorable tax treatment of all tax-motivated transactions, except where, as Chirelstein and Zelenak suggest, expressly authorized by Congress or the IRS. This arrangement, I argue, would reduce waste not only in the private sector but also in government, forcing Congress to make plain when it has agreed to treat its lobbyists generously.

tax shelters, codification, economic substance doctrine, textualism

Abstract:
This Report continues our analysis of Department of Revenue of Kentucky v. Davis, a case argued in the 2007-2008 Supreme Court term. The issue in Davis is the constitutionality of Kentucky's practice (shared by all other states with an income tax) of taxing interest on federally-exempt bonds issued outside Kentucky while exempting its own municipal bonds from taxation. In this installment we evaluate skeptically a number of possible state interests that might be offered to justify that practice. For example, we point out that Kentucky's assertion that the policy conserves state revenue is wrong. We also argue that, if the goal is to transfer revenues from the state to local governments, then exemption is inferior to direct grants.

Dormant Commerce Clause, municipal bonds, fiscal federalism, Pike

Abstract:
This brief Commentary considers the merits of the argument that the Mormon Church's support for Proposition Eight violated federal tax law. I take as given the facts reported by the New York Times and other major news outlets. Although the facts are not really in dispute, much of the underlying law is. There are few clear guidelines governing lobbying by charities. In the end it is impossible to say with certainty whether the Church's conduct will have any tax-law repercussions. My conclusion that there is uncertainty, though, stands in contrast with existing claims that the expenditures of the LDS Church and others are clearly unproblematic.

In addition to its potential interest for those following closely the Proposition Eight saga, my discussion here is aimed at revealing some of the weaknesses of the law of charities. In particular, the Proposition Eight episode exposes a serious hole in the fabric of the federal law: the possibility that massive, multi-million dollar lobbying expenditures, large enough to swamp any opposition, may be perfectly legitimate, so long as they are undertaken by a sufficiently gigantic organization. It is hard to see a good justification for a rule that would, in effect, grant political influence only to the largest charities, but that seems to be one plausible interpretation of current law (albeit an interpretation I argue against here). Further, recent events show again that the IRS so far has failed to grapple with the most important questions surrounding the rules against lobbying, such as the problem of how to value the use of mailing lists, web sites, e-mail, and phone trees - tools that now are central to modern politics.

501(c)(3), lobbying, propaganda, charity

Abstract:
Innovations in government produce positive externalities for other jurisdictions. Theory therefore predicts that local government will tend to produce a lower than optimal amount of innovation, as officials will prefer to free-ride on innovation by others. As Susan Rose-Ackerman observed in 1980, these two predictions, if true, tend to undermine arguments by proponents of federated government that decentralization will lead to many competing "laboratories of democracy."

In this paper, which is aimed primarily at legal academics, we review and critically assess nearly three decades of responses to Rose-Ackerman's arguments, none of which have been discussed in depth in the legal literature. In addition we sketch and evaluate, without rigorously modeling, other possible grounds for believing that local officials may have incentives to innovate in the face of the temptation of free-riding. We also analyze the policy implications that follow from our conclusion that there are no demonstrably overwhelming replies to Rose-Ackerman's skepticism. For instance, we suggest that one conclusion may be that certain regulatory regimes, such as aspects of corporate governance regulation, might best be centered at the national level, where collective action problems affecting public officials are lessened. However, we also caution that this result would depend on the likely effectiveness of industry itself propagating "good" regulation, or the effectiveness of contracting regulatory functions out to intermediaries, such as private consulting firms or non-profit organizations, who might use property rights to more fully capture the gains of policy innovation.

laboratories of democracy, federalism, fiscal federalism, corporate charters, democratic experimentalism, policy innovation, diffusion, public choice, positive political theory

Abstract:
There is a growing trend in federal agencies towards explicit consideration of the Constitution, and the principles of justice that it suggests. In controversies ranging from the Justice Department's challenge to the Oregon Death With Dignity Act to IRS regulation of the political activities of non-profits, agencies have come more and more to rely on their own view of what the Constitution requires or implies.

Academic commentary almost universally lauds this move toward interpretive autonomy, if not the specific interpretations that the current administration has offered. Advocates of republicanism and cooperative regulation welcome the opportunities for wider public deliberation on constitutional issues that agency interpretation offers. And critics of this Supreme Court on both left and right are eager to find any other authority willing to countenance a different substantive view of rights, whether that be a right to be free of discrimination or a right to life.

At the same time, the Court increasingly has suggested that the legitimacy of such interpretations may be in doubt. In City of Boerne v. Flores and similar cases, it rejects, almost disdainfully, the notion that Congress might be a worthy interpretive partner in elaborating constitutional norms. And its opinion in a case holding that agency regulations prohibiting disparate impact discrimination are not privately enforceable might be read to imply that there is a serious constitutional doubt whether an agency can exercise the sort of independent constitutional interpretive authority Boerne seems to condemn. Tax practitioners may recall similar doubts about the Service's authority dating back to the controversy over Bob Jones University.

This Article strives to explain the sharp divergence between critical consensus and judicial reality, with the aim of finding a way to justify cooperation and republican deliberation to a doubting Court. I argue that existing accounts fail to explain judicial attitudes because they do not consider the unique institutional needs of federal judges. Most significantly, judicial claims to sole authority to interpret the Constitution may be part of the constitutive rhetoric of judging, through which the judiciary builds and entrenches a set of norms for its own behavior. These norms, when internalized by judges, help to distinguish judicial behavior from the ordinary politics that judicial review aspires to limit.

I conclude, however, that judicial rhetoric, even in combination with other plausible arguments in favor of exclusivity, is persuasive in at most a small fraction of the constitutional cases that come before courts. I therefore propose a method, based on a survey and synthesis of those arguments, that a court can use in deciding for any given agency interpretation whether the agency's decision is a permissible, complementary elaboration or an impermissible intrusion. I then show how the method offers important insights into, for example, the disputes over disparate impact regulations and the IRS's oversight of non-profit entities.

Departmentalism, Section Five, City of Boerne, Bob Jones University

Abstract:
This Article critiques existing and nascent rules limiting federal agency authority in the name of federalism. Those rules presently bind agencies even more tightly than Congress. For instance, while Congress can regulate to the limits of its commerce power with a sufficiently clear statement of its intent to do so, absent clear congressional authorization an agency cannot, no matter how clear the language of the agency's regulation. Similarly, where Congress can preempt state law, albeit only where its intent to do so is clear, some commentators have read recent decisions to hold that agencies cannot, except upon Congress's clear authorization.

A number of leading commentators have hailed this combination of rules on the grounds that congressional control over questions of federalism is to be preferred to agency decision making. Congress, they claim, is more deliberative than the Executive, more transparent to the public, and more accountable. Additionally, given the relative ease of enacting regulations rather than statutes, those who favor Congress fear that lower barriers to federal expansion in the Executive would lead to run-away federal power.

Our argument here is that both these sets of claims are, at best, accurate only occasionally. We attempt to show that in many instances agencies are, or with wise doctrines of judicial review can be made to be, more democratic and deliberative than Congress. While regulating will almost always be easier than legislating, in many instances the need for additional speed bumps under the wheels of the Executive is negligible, or downright counter-productive. Thus, we argue for a more nuanced set of rules that would permit agencies in many instances to preempt or regulate without the need for express congressional approval.

federalism, preemption, non-delegation doctrine, constitutional avoidance, SWANCC, departmentalism

Abstract:
This draft offers a critical review of the economic literature on the efficiency of low-salience taxes. In particular, I explore the possibility that hidden taxes may in fact be more efficient than others. Since the entire field comprises only a handful of papers, the review is devoted mostly to identifying gaps in our present understanding. For example, the literature so far omits any consideration of the impact of hidden taxes on fiscal federalism, and gives only glancing attention to possible distributive consequences, both topics I attempt to highlight here. Additionally, I attempt to integrate with the tax literature some recent developments in our understanding of bounded rationality in consumers more generally.

[Note: This is a working paper version of "Hidden Taxes."]

optimal taxation, mirrlees, hidden tax, tax salience, bounded rationality, behavioral law and economics, debiasing, Tiebout

Abstract:
The authority to raise and spend money is one of the most expansive and fundamental of all Congress' enumerated powers, particularly when Congress chooses to impose conditions on those who wish to receive its cash. The consensus modern view of this conditional spending is that its unfettered use threatens the diversity and accountability goals of our federalism. As a result, nearly all commentators support either direct or indirect judge-made limits on conditional spending. These claims, I argue, rest on a set of largely unexamined assumptions about the political motivations, budgetary situation, and incentives of the state officials who must decide whether or not to accept federal offers. Thus, this Article attempts to begin a truly in-depth study of the political economy of state decisions to accept federal funds. In particular, I focus on state officials' own incentives to preserve diversity and accountability, albeit for self-interested reasons. For example, I document and model the ways in which opportunities to impose hidden taxes, or to export taxes onto outsiders, may encourage officials to turn down federal grants. I also examine closely the available empirical evidence on the actual fiscal situation of states, concluding that there is no evidence states are in such dire financial straits that they are likely ever obliged to accept federal funds. In sum, I argue that the current consensus is likely mistaken about the need for constraining conditional federal grants.

Spending Clause, Dole, fiscal federalism, grants, conscription, flypaper effect

Abstract:
Our federal government annually donates more than $75 billion in potential revenue to the States under section 164 of the Tax Code, the provision allowing itemizing taxpayers to deduct the cost of the state and local income, property, and sales taxes they paid during the tax year. The deduction is, in theory, supposed to further federalism, by shifting revenues - and therefore regulation - downwards from the federal government to states and their local subsidiaries. What few writers seem yet to have recognized, though, is that using the deduction for that end, rather than some other fiscal tool, may have the perverse effect of undermining the efficiency, transparency, and even the democratic character of those local governments.

More generally, however, my goal here is to show that section 164 is about more than (boatloads of) money. Other commentators, especially economists, have recognized that the deduction may shift the locus of regulation from federal to state and local governments. In this Article I argue that the deduction may play a large but currently underappreciated role not only in the relative sizes of local and federal governments but also in the structure and effectiveness of sub-national governments. Local governments develop in response both to direct political demands and also the indirect pressure generated by the threat of "exit," or out-migration to a more efficient or more responsive jurisdiction. The deduction, I argue, significantly affects both of these factors - most obviously by reducing exit pressures, but also by in more subtle ways transforming the processes of direct politics.

SALT, deductibility of state and local taxes, horizontal equity, fiscal federalism, spillovers, cognitive bias, exit, Tiebout

Abstract:
By sheer dollars alone, the largest impact of the Alternative Minimum Tax is to deny many taxpayers the deduction for the taxes they paid to their state and local governments under § 164 of the Internal Revenue Code. This Article provides a fine-grained analysis of the overall fairness of the state- and local-tax deduction ¿ and, by implication, the fairness of its partial repeal through the Alternative Minimum Tax. I offer for the first time a close examination of how newly understood limits on taxpayer mobility and rationality might affect individuals' choices of bundles of local taxes and local government services, which in turn informs our assessment of the "fairness" of those exchanges. Many of these lessons can be generalized to consumer choices more generally. In addition, I track the reciprocal benefits and burdens that flow between the national government and local governments ¿ again, although the influx or outgo of billions of dollars surely affects how the federal tax system should account for the outputs of local government, scholars have neglected that question. Finally, I note that § 164, and therefore the Alternative Minimum Tax, can have serious effects on federal-state relations, such that the debate over both provisions is in many ways a debate not only over fairness but also about federalism.

Alternative Minimum Tax, AMT, state and local tax, section 164, horizontal equity

Abstract:
The use of conditional federal spending has been the target of frequent attacks, both in academia and occasionally in the courts. Although the Supreme Court does not directly police conditional spending legislation in any meaningful way, it does restrict the Spending Clause by means of an actively enforced clear statement rule. Unlike the Spending Clause itself, the rule enjoys near-universal approval, including from such surprising sources as Laurence Tribe and Cass Sunstein.

This Article argues that both critics of conditional spending and supporters of the clear statement rule are wrong. Indeed, many of the same arguments that weigh against judicial limitations on the Spending Clause also demonstrate that the rule is unnecessary. For example, I show here that where Congress has no authority to enact regulation directly -- in creating Gun-Free Schools Zones, say -- the States know that Congress must obtain their agreement before any legislation can take effect. That sets the stage for crippling state hold-outs and hold-ups. It is hard to see the need for judicial defense of federalism values when the political process is so effective at achieving the same end.

The clear statement rule also seriously undermines conditional spending's usefulness as a fiscal tool for coordinating federal policy. Constitutionally-inspired legislation is especially important in this era of the passive virtues, in which the Constitution is most often enforced by reading a statute or regulation to avoid constitutional doubts. Because federal courts do not have comparable power over state law, and state courts are easily overcome by local politics, the Constitution (in the absence of constitutionally-flavored federal legislation) offers lesser protection against state infringements. Yet the clear-statement rule makes it difficult for spending legislation to fill that void; constitutional reasoning must begin with broad principles, not a minutely detailed code.

Thus, this Article argues that we must not only preserve conditional spending, but also unleash it; it is the only way to preserve constitutional balance, and adapt to an evolving world, in our era of active judicial enforcement of federalism values.

Spending, federalism, section five, Boerne, clear statement rules

Abstract:
This Article critiques the prevailing justification for subsidies for the charitable sector, and suggests a new alternative. According to contemporary accounts, charity corrects the failure of the private market to provide public goods, and further corrects the failure of government to provide goods other than those demanded by the median voter.

However, the claim that government can meet the needs only of a single “median voter” neglects both federalism and public choice theory. Citizens dissatisfied with the services of one government can move to or even create another. Alternatively, they may use the threat of exit to lobby for local change. Subsidies for charity inefficiently distort the operation of these markets for legal rules.

Nonetheless, there remains a strong case for subsidizing charity, albeit on grounds new to the literature. Charity serves as gap-filler when federalism mechanisms break down. For example, frictions on exit produce too little jurisdictional competition, and excessively easy exit produces too much competition - a race to the bottom. At the same time, competition from government constrains inefficient charities. Thus, charity and government each perform best as complements to the other.

Finally, this Article sketches the normative legal consequences of these claims. Most significantly, I respond to the claims by Malani and Posner that for-profit charity would be superior to current arrangements. That suggestion would fatally weaken competition between charity and government, defeating the only persuasive purpose for charitable subsidies.

charity, charitable contribution deduction, section 170, 501(c)(3), for-profit charity, federalism, warm glow, civil society, privatization

Abstract:
This Article presents a case study in designing cooperative interstate institutions. It takes as its subject the Streamlined Sales and Use Tax Agreement ("SSUTA"), a recently-developed compact among the States now awaiting congressional ratification. The SSUTA's primary goal is to bring uniformity to the field of state and local sales taxation, a regime in which multi-jurisdictional sellers now confront thousands of different sets of rules. I predict here that the SSUTA as currently designed is unlikely to accomplish that goal, and attempt to suggest possible amendments that could improve its expected performance. From these efforts I extract larger lessons about the workings of many similar cooperative ventures.

My prognosis for the SSUTA turns largely on the political economy of state taxation. Extending Daniel Shaviro's seminal work on state incentives for tax-law disuniformity, I examine how the institutional arrangements set out by the SSUTA respond to the pressures identified by Shaviro. I additionally weigh a number of factors omitted in his analysis. For example, I consider the possible public-regarding tendencies of bureaucratic ideology or sense of mission among either state-level tax administrators, state courts, or the governing body of the SSUTA

Having made a more precise diagnosis of the problems that confront the SSUTA, I am able to suggest more precisely targeted solutions, such as tying the deductibility of businesses' federal deduction for state and local tax paid to federal administrative approval of the taxing state's compliance with SSUTA, with approval subject in turn to federal judicial review. In this way, the businesses are made to internalize the costs they impose on others. And the most politically remote actors, federal judges, would have a reliable interpretive partner to supplement their own, ordinarily rather weak, fact finding and policy analysis.

streamlined sales and use tax agreement, SSUTA, dormant commerce clause, Quill, Cuno, positive political theory, electronic commerce

Abstract:
Since 1980, private suits brought under 42 U.S.C. Section 1983 have been a prime vehicle for enforcing federal statutory norms against state and local government. Federal regulations, however, affect a vast cross-section of state conduct not directly controlled by federal statutes. It is therefore surprising to discover that, notwithstanding some occasional acknowledgments of the considerable importance of the issue, there is almost no scholarly discussion concerning to what extent federal norms embodied in regulations can be enforced through private Section 1983 litigation. The federal Courts of Appeals are badly divided over the question, and no coherent rationale for one approach or the other has emerged.

This Article attempts to fill the existing theoretical gap by beginning with first principles of statutory interpretation. I argue that we should read the word laws in Section 1983 in light of two important canons of construction, one favoring executive interpretations of the law, and the other, favoring federalism. Contrary to common assumptions about Section 1983, permitting federal agencies to authorize private suit will actually further state autonomy. Agency-authorized suits create space for collaboration between federal and state regulators, empowering the States, and enhance accountability of otherwise politically remote state bureaucrats in ways that APA or due-process challenges cannot. Finally, by shifting the forum for disputes from federal agency rank-and-file to state or federal court, Section 1983 litigation affords States the benefit of the Court's recent developments in sovereign immunity jurisprudence. Thus, when we read laws, we should presume that Congress intended to capture these benefits, and to allow federal agencies to authorize suits under Section 1983.

private right of action, section 1983, federalism, disparate impact, Sandoval

Abstract:
As recent events illustrate, state finances are pro-cyclical: during recessions, state revenues crash, worsening the effects of economic downturns. This problem is well-known, yet persistent. We argue here that, in light of predictable federalism and political economy dynamics, states will be unable to change this situation on their own. Additionally, we note that many possible federal remedies may result in worse problems, such as creating moral hazard that would induce states to take on excessively risky policy, both fiscal and otherwise. Thus, we argue that policy makers should consider so-called “automatic” stabilizers, such as are found in the federal tax system.

We present an argument from micro-economic foundations suggesting that the federal Alternative Minimum Tax has potentially salutary - and heretofore unrecognized - effects that counteract pathologies of state budgets over the business cycle. Namely, as incomes grow and the AMT hits more state residents, state spending becomes more expensive in flush times as the federal tax subsidy for state and local taxes is reduced. Conversely, when state fiscal health deteriorates, the federal tax subsidy grows as fewer state residents fall under the AMT, boosting taxpayer support for state spending. This stabilizing mechanism has the potential to overcome problems state politicians face committing to saving during boom times and spending during bust times. We present empirical evidence suggesting that the AMT does indeed provide some degree of fiscal stabilization in accordance with micro-theory. We provide policy suggestions regarding how the AMT could be modified to leverage this stabilization effect.

Calls to “reform” the Alternative Minimum Tax pre-date the recent economic downturn. AMT reform has appeared in many congressional stimulus proposals, but significant cut-backs are unlikely as federal deficits are projected to grow for the foreseeable future. Our argument here implies that any AMT reform effort should consider whether the AMT’s stabilizer function could be replaced by any other viable mechanism.

State finances, revenue, taxation, recession, pro-cyclical, federal remedies, moral hazard, risk, automatic stabilization, alternative minimum tax, AMT reform, ATM, Fiscal federalism tax, Tax, Social Insurance

Abstract:
This is a condensed version of the authors' longer work, "Administrative Law's Federalism: Preemption, Non delegation, and Agencies at the Edge of Federal Power," Duke Law Journal, Vol. 57, p. 1933, 2008. It offers a short, accessible overview of our argument that (contra the apparent recent holding in Wyeth v. Levine) Congress should not be obliged clearly to delegate the power to preempt before an agency can exercise that power.

preemption, presumption against preemption, federalism, clear statement rule, Gregory, Wyeth, Chevron, SWANCC

Abstract:
This Essay, prepared as a contribution to the 2009 NYU Annual Survey of American Law Symposium on Preemption and Tort Law, takes issue with the standard position in the law and economics literature that substantive consumer-protection rules should not be used to redistribute wealth. Models of that position, I argue, have so far assumed the existence of only one sovereign. However, in a more realistic world where there is both local and national government, it is possible that redistribution through local tort or contract law is superior to either national or local redistributive taxation.

The heart of the argument is that, while non-tax distribution at all levels is subject to a double distortion problem, redistributive taxes in a federal system also have problems not taken into account in the standard model. Taxation at the national level cannot fully capture social preferences for redistribution. At the same time, attempts to enact redistributive taxes at the local level give rise to deadweight losses from inter-jurisdictional tax competition. Redistributive local legal rules allow better incorporation of local preferences for redistribution, while reducing deadweight losses. The deadweight losses of legal rules are potentially smaller because legal rules are more like "benefit taxation": firms cannot exploit the benefits of the market jurisdiction without exposing themselves to the corresponding legal rules.

Thus, my argument has implications not only for decisions whether to preempt local consumer protection laws, but also for the design of legal systems more generally. I concede, however, that theory is ambiguous as to whether redistributive local legal rules in fact increase welfare; my only argument is that current assumptions to the contrary must be tested empirically.

redistribution, double distortion, federalism, landlord will raise the rent, preemption, fiscal federalism, benefit taxation, law and economics, efficiency of the legal system