How Should Governments Promote Distributive Justice?: A Framework for Analyzing the Optimal Choice of Tax Instruments

Abstract

A particular methodology derived from public finance economics has become very influential in the legal literature on taxation and related topics. Sometimes called the “double-distortion” approach, this methodology forms the heart of Louis Kaplow’s book “The Theory of Taxation and Public Economics” and is also the foundation of prominent work by other leading tax legal scholars such as David Weisbach and James Hines.

This Article develops an extended critique of how the double-distortion approach has been used to make legal policy arguments. In doing so, this Article constructs a framework for analyzing how governments can optimally raise revenues and promote distributional equity through the design of both tax systems and legal rules.

Keywords: double distortion, distribution, tax instrument, legal rule, tax, optimal tax, Ramsey, Atkinson, Stiglitz, sufficient statistic