Revisiting the Role of Legal Rules and Tax Rules in Income Redistribution
35 Pages Posted: 31 May 2002 Last revised: 5 Jun 2013
Date Written: May 1, 2002
For many years the conventional wisdom on whether legal rules should be used to redistribute resources in society, or whether instead redistribution should be done exclusively through to the tax-and-transfer system, was considered an empirical question best resolved on a case-by-case basis. More recently, Louis Kaplow and Steven Shavell have demonstrated that, under certain assumptions, it is possible with respect to any income-dependent legal rule to design a "simple alternative" legal regime that is independent of income (and in which all redistribution is accomplished through the tax-and-transfer system) and which leaves everyone as well off as under the income-dependent rule, but that also produces additional revenue for the government.
In this Article we relax two of Kaplow and Shavell's simplifying assumptions. First, following the lead of Chris Sanchirico, we introduce heterogeneity with regard to skill in taking care and with regard to ability to generate income. Second, and more important, we relax the assumption on which Kaplow and Shavell critically rely that the social planner has complete information. In our Article, we are able to present a more complete picture of the ex-ante adjustments that will be made by individuals when they face an income-dependent legal regime. We show that an income-dependent tort rule, for example, gives wealthy potential tortfeasors two degrees of freedom; whereas the income-independent regime gives them only one. The failure of prior researchers to emphasize these two degrees of freedom, we believe, has caused considerable confusion. We argue that, given this two degrees of freedom (and the heterogeneity among individuals), Kaplow and Shavell's theoretical model of a tax-and-transfer alternative to redistributive legal rules is no longer a "simple alternative." To the contrary, it is virtually impossible to implement, for the informational burden on the social planner is insurmountable.
Keywords: redistribution, distributive justice
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