Is Local Consumer Protection Law a Better Redistributive Mechanism Than the Tax System?

21 Pages Posted: 10 Jun 2009 Last revised: 30 Jan 2011

Brian D. Galle

Georgetown University Law Center

Date Written: June 8, 2009

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.

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

JEL Classification: D63, H23, H71, K13

Suggested Citation

Galle, Brian D., Is Local Consumer Protection Law a Better Redistributive Mechanism Than the Tax System? (June 8, 2009). 65 NYU Annual Survey of American Law 525; FSU College of Law, Public Law Research Paper No. 377; FSU College of Law, Law, Business & Economics Paper No. 09-14. Available at SSRN: https://ssrn.com/abstract=1416282

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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