Redistributing Optimally: Of Tax Rules, Legal Rules, and Insurance
103 Pages Posted: 30 Jan 2002 Last revised: 25 Jul 2019
Date Written: 2002
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.
Keywords: Tax Rules
Suggested Citation: Suggested Citation