To Confuse and Protect: Taxes and Consumer Protection

Imperfect information may cause rationally bounded individuals to make consistent mistakes. This paper focuses on potential misperception of prices. Consumers may underestimate the full price of tax-exclusive prices and hence overconsume goods and services. Countries with a significant consumption tax base (for example, a value-added tax) regulate tax-inclusive price presentation to overcome consumers’ biases and thus to protect consumers. The United States is considering the adoption of a federal consumption tax base and therefore may be similarly expected to regulate tax-inclusive price presentation. Based on a theory of optimal taxation, this paper explains why tax-exclusive rather than tax-inclusive prices can be socially desirable. To the extent that tax-exclusive pricing confuses consumers who then ignore non-indicated taxes and overconsume, consumers may be better off. The argument is counterintuitive, in particular for consumer protection advocates: confusion is actually good for consumers. The paper investigates several potential justifications for tax-inclusive pricing, and shows that a reasonably accepted rationale is rather limited in scope and unrelated to consumer-protection motivations. Finally, the paper extends the analysis to income-based taxes and to misleading non-tax (marketing) practices

Regulation of Book Markets

Over the years, many European countries have regulated their national book markets. Chief among the regulatory schemes is the resale price maintenance (“RPM”) regime, under which booksellers must offer books for a fixed price for a limited time period. The suggested rationales for this legal regime are mainly: (1) viewing books as cultural goods that deserve special treatment; (2) advancing diversity in the book market; (3) creating a wide distribution of and accessibility to books; and (4) supporting small booksellers. This Article explores the normative rationales for the RPM regime’s adoption and design in book markets. The RPM regime has been discussed and analyzed using a positive economic framework, but its application in reality has been missing a normative theoretical basis. This Article demonstrates that absent such a theoretical basis, policymaking is meaningless. Policymakers as well as courts cannot solely rely on positive economic analysis. Normative analysis is inevitable. This Article explores the missing normative analysis of RPM regimes in the context of book markets. It exposes an important blind spot in regulatory policy and judicial judgment. Lastly, the normative framework introduced in this Article may prove relevant for American RPM arrangements. Since American antitrust scrutiny of RPM schemes recently transformed from a per se rule to a rule of reason analysis, American policymakers and courts are expected to encounter a new wave of resurfacing RPM schemes

Redistribution Mechanisms

Many legal scholars believe that equity should be considered in designing legal rules. Kaplow and Shavell (1994) seriously challenged this approach. They proved that the tax transfer system is superior to legal rules in redistributing wealth. This paper reexamines their 'double distortion' claim, presenting two main arguments. The first shows that the 'double distortion' claim is not necessarily valid under welfarism. In particular, under an ex post approach to welfarism, which generally implies that society pays attention to the ex post (actual) rather than expected redistribution, the proof of the tax superiority breaks down. Secondly, and more importantly, it is proven that, in principle, tort rules can easily be designed to circumvent 'double distortion' effects. Thus, the tort system is not inherently more inefficient than the tax-transfer system in accomplishing redistribution. The paper generally concludes that although there are often no good reasons for redistribution within the legal system, theoretically and a priori it is not an inferior redistribution mechanism.

Tax-Loss Mechanisms

Business losses are a persistent reality and far from an insignificant economic phenomenon. They are disruptive for businesses and burdensome for tax authorities. This Article builds a theory of tax-loss-mechanism design and discusses its normative implications. Although income-tax laws in the United States and elsewhere conclusively adopt a loss-offset mechanism, economists often advocate that losses be governed by a tax-refundability regime. Tax scholars, on the other hand, largely ignore the question of the desirable tax-loss mechanism. This Article constructs and applies an economic framework for analyzing three prominent tax mechanisms for the treatment of losses: offset, refundability, and transferability. The economic theory that we develop yields several new insights and results. We show that all three tax mechanisms diverge primarily by legal design choices rather than by any inherent feature, and therefore, contrary to the common understanding in the literature, any normative choice can be implemented through any of the three, setting aside implementation costs. The commonly perceived differences among these tax mechanisms are erroneously grounded in observations of existing tax rules; this has prevented scholars from envisioning a redesign according to policy preferences. The analysis further redirects the tax-policy focus to the desirable tax-rate schedule for losses (regardless of the choice of the tax mechanism). It uncovers the endogenous tax-rate schedule that applies to losses under typical tax-treatment mechanisms. In the case of loss offset, the revealed schedule seems capricious with decreasing or cyclical tax brackets. Our analysis derives a few additional new results, which are subsequently examined in our suggested normative framework. Generally, this Article: (a) proposes a general, design-based approach to tax laws and (b) applies it to the treatment of losses, proving its value by inferring new results, which in turn (c) makes possible a broader and better-informed normative consideration for tax scholars and policymakers