Distribution Through Taxation Versus Legal Rules, and the Epistemic Limits of Law-and-Economics

This Article develops an epistemic critique of the view, widely held in law-and-economics, that legal rules should always be chosen for efficiency and that redistribution to produce a fair distribution should be conducted solely through the tax-and-transfer system. In place of this orthodox view, I develop an alternative distributive theory.The canonical ‘double distortion’ argument for the orthodox position, formulated by Kaplow and Shavell (1994), claims that opting for efficient legal rules minimizes economic distortions and maximizes aggregate social wealth, some of which can then be redistributed via the tax-and-transfer system to those who would have been better off under the distributionally fair rules, thereby producing Pareto improvements relative to that latter regime.My epistemic critique begins with the observation that to create such Pareto improvements, the state must know the counterfactual distribution that would have resulted from adopting the fair legal rules, since this is the baseline used to determine (i) which individuals are to receive (and finance) transfer payments, and (ii) in exactly what amounts. In this respect, the form of reasoning employed by Kaplow and Shavell is the most epistemically demanding of all those commonly utilized in normative lawand- economics. Drawing on literature from the methodology of economics, I develop a number of arguments for why predictions of precise distributions are typically not possible. In practice, policymakers must generally be content to elicit more modest empirical inferences from economic models, such as the directional impact of policies or other coarse-grained properties of outcomes. In the course of this analysis, the epistemic limits of law-and-economics are duly located.This critique has far-reaching implications for the role of the legal system in the institutional realization of distributive justice. I conclude that on a realistic view of the predictive power of economic and social science, a pluralist approach, which recruits many slightly redistributive legal rules to support the tax-and-transfer system, will be most epistemically feasible. A novel version of this pluralist approach, which I call the ‘prudent investor’ framework, is developed to replace the orthodox distributive method.