The Knowledge Tax
Government subsidies to higher education have recently become a hot-button political issue. But what if the federal government does not actually subsidize higher education, but taxes it? Labor economists struggle to explain why the rates of return to higher education have remained much higher than the rates of return to other investments. This Article proposes a novel explanation: distortionary taxation. Economic theory suggests that when investments that are substitutes for one another are taxed inconsistently, investors shun the investment option that is taxed more heavily. Unfavorable tax treatment of higher education could therefore create an undersupply of educated labor. This distortion may reduce economic growth and social welfare.
We thank Mike Livermore, Mike Gilbert, Greg Mitchell, Pierre Verdier, Bobbie Spellman, Michal Barzuza, Rip Verkerke, and John Harrison for helpful comments and suggestions.
We thank Mike Livermore, Mike Gilbert, Greg Mitchell, Pierre Verdier, Bobbie Spellman, Michal Barzuza, Rip Verkerke, and John Harrison for helpful comments and suggestions.
This Essay was written for the L&E vs. LPE Symposium organized by The University of Chicago Law Review. We thank Mike Livermore, Mike Gilbert, Greg Mitchell, Pierre Verdier, Bobbie Spellman, Michal Barzuza, Rip Verkerke, and John Harrison for helpful comments and suggestions.
Law and economics (L&E) emerged as a field in the middle of the twentieth century, it focused on using economic theory to study the common law. During this period, L&E offered insights so novel that it not only profoundly influenced legal doctrine, but the movement’s key figures also became some of the most cited and acclaimed scholars in the American academy. The field of law and economics has since continued to grow and become more technically sophisticated, but it is also a less cohesive movement. Moreover, L&E has been misunderstood and misrepresented by the emerging law and political economy (LPE) movement. This Essay starts the process of reclaiming L&E by offering a definition of the current field: Contemporary law and economics is an academic field that (1) has a commitment to using the social scientific method of inquiry to (2) study questions about the law and legal institutions (3) in a way that is typically informed by economic insights. It then describes L&E’s comparative advantages, explains its relationship to the LPE movement, and suggests a roadmap for its renewed relevance.
For helpful comments, we are grateful to Kiran Chawla, Lee Fennell, Louis Kaplow, Adi Leibovitch, Richard McAdams, David Weisbach, workshop participants at the University of Chicago, and the editors of The University of Chicago Law Review. We thank Hannah Lu and Safia Sayed for excellent research assistance.
For helpful comments, we are grateful to Kiran Chawla, Lee Fennell, Louis Kaplow, Adi Leibovitch, Richard McAdams, David Weisbach, workshop participants at the University of Chicago, and the editors of The University of Chicago Law Review. We thank Hannah Lu and Safia Sayed for excellent research assistance.
Should legal rules be designed exclusively based on efficiency considerations, or should they also attempt to promote an equitable distribution of social resources? The answer traditionally associated with scholarship in law and economics is that they should focus only on efficiency. Even for a society that cares about achieving an equitable distribution of resources by income, the argument goes, it is generally better to adopt legal rules based exclusively on efficiency considerations while relying on the income tax and transfer system to promote distributional goals. However, even proponents of the claim that social welfare is best promoted through the adoption of efficient legal rules agree that there are certain conditions under which it does not apply. This Essay considers when legal rules should be efficient and when they should not. It focuses on conditions that can cause the socially optimal legal rule to diverge from the efficient legal rule—i.e., the legal rule that would be optimal absent distributional considerations. Its goal is to translate these arguments to settings where the question of interest relates to the design of a legal rule rather than, say, the design of a commodity tax. In particular, it seeks to clarify the types of arguments that can support the adoption of inefficient legal rules when income taxation is available as a policy tool.
For helpful comments, we are grateful to Kiran Chawla, Lee Fennell, Louis Kaplow, Adi Leibovitch, Richard McAdams, David Weisbach, workshop participants at the University of Chicago, and the editors of The University of Chicago Law Review. We thank Hannah Lu and Safia Sayed for excellent research assistance.
For helpful comments, we are grateful to Kiran Chawla, Lee Fennell, Louis Kaplow, Adi Leibovitch, Richard McAdams, David Weisbach, workshop participants at the University of Chicago, and the editors of The University of Chicago Law Review. We thank Hannah Lu and Safia Sayed for excellent research assistance.
Should legal rules be designed exclusively based on efficiency considerations, or should they also attempt to promote an equitable distribution of social resources? The answer traditionally associated with scholarship in law and economics is that they should focus only on efficiency. Even for a society that cares about achieving an equitable distribution of resources by income, the argument goes, it is generally better to adopt legal rules based exclusively on efficiency considerations while relying on the income tax and transfer system to promote distributional goals. However, even proponents of the claim that social welfare is best promoted through the adoption of efficient legal rules agree that there are certain conditions under which it does not apply. This Essay considers when legal rules should be efficient and when they should not. It focuses on conditions that can cause the socially optimal legal rule to diverge from the efficient legal rule—i.e., the legal rule that would be optimal absent distributional considerations. Its goal is to translate these arguments to settings where the question of interest relates to the design of a legal rule rather than, say, the design of a commodity tax. In particular, it seeks to clarify the types of arguments that can support the adoption of inefficient legal rules when income taxation is available as a policy tool.