On the limits of redistributive taxation: establishing a case for equity-informed legal rules

This paper questions the prevailing norm regarding the means of redistribution, namely the "division of labor" between legal rules and the tax and transfer system. It is common practice in the law and economics literature to discuss only the efficiency aspects of legal rules, relegating distribution to the tax and transfer system. These are the three main theoretical justifications for this practice: 1. Bargaining-around argument, 2. Haphazardness argument, and 3. Double distortion argument by Louis Kaplow and Steven Shavell. A straightforward cost-benefit analysis suggests, therefore, that legal rules should be equity-informed. Nevertheless, when comparing the efficiency of the tax system vis-a-vis legal rules, it is necessary to take into account administrative and compliance costs. The main source of inefficiency does not derive from the labor/leisure distortion, but from administrative and compliance costs. Using legal rules to address equity concerns would be socially desirable.