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Redistributing Optimally: Of Tax Rules, Legal Rules, and Insurance


Kyle D. Logue


University of Michigan Law School

Ronen Avraham


University of Texas at Austin - School of Law

2002

Michigan Law and Economics Research Paper No. 02-001

Abstract:     
The existing literature on redistributive legal rules has focused almost exclusively on redistributive policy with respect to income inequality and has, in general, discouraged the use of such rules, favoring instead the exclusive use of the tax-and-transfer system. More recently, this view has begun to come under attack from various quarters. In this Article we examine the redistributive-rules debate and provide our own theoretical framework for deciding when tax rules and when legal rules (or when some combination of the two) should be used to achieve society's redistributive ends. Our basic claims are that (a) income inequality is not the only legitimate target of redistributive policy, and (b) the redistribution-minded policymaker ought to choose the redistributive policy instrument that has a comparative advantage at redistributing with respect to the particular type of inequality that is being targeted. We further suggest that, in making that comparative-advantage determination, the policymaker should consider the relative institutional capacities of the legal system and the tax system both to observe the relevant type of inequality and to redistribute with respect to it. We argue that our framework would apply not only to income inequality, but also to inequality along other dimensions.

One of the contributions of the Article, with respect to income-redistributive-rules in particular, is to distinguish between "class-based redistributive rules" (which redistribute from one preselected class of parties to another) and "case-specific redistributive rules" (which redistribute between the two parties before the court) and to explore the differences in those two approaches. Our general conclusion with respect to income redistribution is that the tax-and-transfer system usually will have a comparative advantage, both in terms of observing or measuring income and in terms of redistributing with respect to it, because of the contracting-around and haphazardness problems. We do suggest, however, that if income-redistributive rules are to be used (as a supplement to the income tax), one of the effects would be to deputize liability insurance companies as a sort of privatized tax collector, which may or may not be desirable.

Another contribution of the paper is to identify several examples of non-income measures of inequality with respect to which the legal system has a redistributive comparative advantage. Perhaps the best example involves genetically determined diseases, such as Huntington's disease. We argue that, with respect to that type of inequality (i.e., the inequality of well-being between those who have the gene and those who do not), the best redistributive tool arguably would be a legal rule that forbade insurers from discriminating on the basis of their insured's genetic information. Such a rule would produce an automatic transfer - via cross-subsidization - at relatively low cost, when compared with a tax-and-transfer alternative.

Number of Pages in PDF File: 104

Keywords: Tax Rules

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Date posted: January 30, 2002  

Suggested Citation

Logue, Kyle D. and Avraham, Ronen, Redistributing Optimally: Of Tax Rules, Legal Rules, and Insurance (2002). Michigan Law and Economics Research Paper No. 02-001. Available at SSRN: http://ssrn.com/abstract=298622 or http://dx.doi.org/10.2139/ssrn.298622

Contact Information

Kyle D. Logue
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)
HOME PAGE: http://cgi2.www.law.umich.edu/_FacultyBioPage/facultybiopagenew.asp?ID=220

Ronen Avraham (Contact Author)
University of Texas at Austin - School of Law ( email )
727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)
HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

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