Taxes Versus Legal Rules as Instruments for Equity: A More Equitable View

Abstract:     
Law and economic analysis most often evaluates legal rules solely on the basis of the efficiency criterion. The justification usually offered for this exclusive focus on efficiency is that distributive goals are best accomplished through the tax code. This paper adopts the same framework used to formalize this justification and acheives quite different results: It is shown that: 1) even in the presence of an optimally redistributive tax code, any concern for "equity" dictates that legal rules should deviate from efficient standards in a manner that redistributes toward the less-well-off; 2) any showing that differences in taxable attributes such as income or wealth are the dominant components of overall inequality would go only to the direction of the proper equity adjustment to legal rules, not to the fact that some adjustment should be made; and 3) the role of equity adjustments to legal rules is not limited to correcting inequalities that arise within the legal system, but extends to correcting inequalities arising in other areas of the economy.

Number of Pages in PDF File: 24

Accepted Paper Series