Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income
![handle is hein.journals/legstud23 and id is 673 raw text is: WHY THE LEGAL SYSTEM IS LESS EFFICIENT
THAN THE INCOME TAX
IN REDISTRIBUTING INCOME
LOUIS KAPLOW and STEVEN SHAVELL*
IN economic analysis of law, normative judgments about legal rules are
usually based on the rules' efficiency, regardless of their effects on the
distribution of income. As a consequence, the economic approach is often
criticized. Such criticism would be moot if the income tax system-
understood here to include possible transfer payments to the poor-could
be used freely to achieve any desired distribution of income. But income
taxes and transfer payments distort incentives to work, limiting the de-
gree to which it is socially desirable to employ the income tax system to
redistribute income. The question therefore arises whether legal rules'
should be used to take up some of the slack and promote distributional
objectives,2 even if at a sacrifice to efficiency.
In this article, we develop the argument that redistribution through
legal rules offers no advantage over redistribution through the income
tax system and typically is less efficient.' The reason is that using legal
* Professors, Harvard Law School, and Research Associates, the National Bureau of
Economic Research. We are grateful for comments from Jennifer Arlen, Reuven Avi-
Yonah, David Charny, A. Mitchell Polinsky, Alvin Warren, and participants in a workshop
at Georgetown University Law Center.
1 For purposes of this article, the term legal rules refers to rules other than those that
define the income tax and welfare system.
2 Our discussion concerns the overall distribution of income or wealth, not entitlement
to payment based on desert.
3 The first model establishing this point is in Steven Shavell, A Note on Efficiency vs.
Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Opti-
mal Income Taxation? 71 Am. Econ. Rev. 414 (1981). A related argument is made in Aanund
Hylland & Richard Zeckhauser, Distributional Objectives Should Affect Taxes but Not
Program Choice or Design, 81 Scand. J. Econ. 264 (1979). (For extensions and further
applications, see Louis Kaplow, Should the Government's Allocation Branch Be Concerned
about the Distortionary Cost of Taxation and Distributive Effects? (Discussion Paper No.
137, Harvard Law School Program in Law and Economics 1993).)
It does not appear, however, that the point is understood in legal academia. See, for
[Journal of Legal Studies, vol. XXIII (June 1994)]
© 1994 by The University of Chicago. All rights reserved. 0047-2530/94/2302-0001$01.50
667](ViewImageLocal?handle=hein.journals/legstud23&div=35&collection=&method=preview&ext=.png&size=3)
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Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income
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