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§ Abstract: According to accepted wisdom, “the tax substitution argument” fairly establishes that it is best to tax only labor income, and not also income from savings and investment. In this Article, I show that the tax substitution argument - which is actually a disjointed collection of arguments - is variously incomplete, incorrect, and conclusory.

§ Keywords: Tax policy, equity and efficiency, optimal taxation, tax substitution argument, consumption tax versus income tax, Atkinson and Stiglitz, taxes versus legal rules.

§ Web appendix: here.

· Progressivity and Potential Income: Measuring the Effect of Changing Work Patterns on Income Tax Progressivity[3] 108 Colum. L. Rev. 1551 (2008)

§ Abstract: The income tax taxes the proceeds from market work, but not the proceeds from time otherwise allocated - whether enjoyed as self-provided goods and services or leisure time per se. A two-earner couple that out-sources household and child care services, for instance, pays for these services with after tax earnings, while a single-earner couple that self-provides such services pays no tax on their provision. This article uses data from the Panel Study of Income Dynamics to measure the distributive impact of the implicit exclusion for non-market activity. Viewing the exclusion as a kind of tax benefit, it asks: how is such tax benefit distributed across the income spectrum? The article finds that variation across income levels in the labor-income realization ratio - the portion of potential labor income that is realized as actual labor income - has played a decisive role in shaping the real progressivity of the Federal income tax. On paper, the Federal income tax became more progressive during the 1990s. When average tax rates are measured in terms of potential rather than actual income, however, the income tax shows a decline in progressivity during that decade. The discrepancy arises from a change in work patterns. At the start of the decade, tax units with higher income were realizing a greater proportion of their potential earnings than were tax units with lower income. By the end of the decade, the realization ratio was greater at the lower end of the potential income spectrum. This reversal in labor income realization patterns was substantial enough to overpower the increase in statutory progressivity.

§ Keywords: Income taxation, progressivity, endowment taxation, work patterns, potential income, tax incidence, redistribution.

§ Web appendices

v More technically detailed working paper version

v Stata do file creating variables from PSID data.

v Stata program that runs estimation procedure and was submitted to balanced repeated replication.

v Appendix explaining actual income tax figures and graphs in terms of tax code provisions

· The Tax Advantage to Paying Private Equity Fund Managers With Profit Shares: What is it? Why is it Bad? 75 U. Chic. L. Rev. 1071 (2008)

§ Abstract: Private equity is very much in the public eye. The prototypical private equity fund purchases, restructures, and resells ailing companies. The managers of such funds are typically paid with a share of the fund's profits. Over the last several months, the favorable income tax treatment of these compensatory profits interests has been the subject of an ever swelling stream of headlines, editorials, and Congressional hearings. But despite the attention the issue has received, the tax advantage of compensatory profit shares is not well understood, and the reasons for reform are, accordingly, not well developed. This article clarifies the nature of the tax advantage and, with that understanding in mind, critically assesses some of the chief arguments for and against the current tax treatment.

§ Keywords: Private equity, profits interests, carry, capital gains, ordinary income, imputed income, deferral.

§ Web appendix: here

· Taxing Carry: The Problematic Analogy to “Sweat Equity,” 117 Tax Notes 239 (2007)

§ Abstract: The enormity of the earnings reported by some private equity fund managers has drawn sustained public attention to how such earnings are treated under the income tax. Reformers call for eliminating the preferential capital gains treatment accorded to the carried interest portion of fund managers' service compensation. One of the most prominent and thus far successful arguments against reform compares the tax advantage of carried interest to the supposed tax advantage routinely enjoyed by business owners who work in their own business and compensate themselves with sweat equity rather than salary. This paper argues that sweat equity is not only an inapt analogy for carried interest, but is, on its own terms, misconceived. The tax advantage of carried interest is a matter of exploiting differences in the marginal tax rates of fund managers and fund investors. The tax advantage to sweat equity is largely nonexistent.

§ Keywords: Carried Interest, Carry, Profits Interest, Sweat Equity, Private Equity.

· Inequality and Uncertainty: Theory and Legal Applications, 155 U. Penn. L. Rev. 279 (2006) (with Matthew Adler)

§ Abstract: "Welfarism" is the principle that social policy should be based solely on individual well-being with no reference to "fairness" or "rights." The propriety of this approach has recently been the subject of extensive debate within legal scholarship. Rather than contributing (directly) to this debate, we identify and analyze a problem within welfarism that has received far too little attention. Call this the "ex ante/ex post" problem. The problem arises from the combination of uncertainty - an inevitable feature of real policy choice - and a social preference for equality. If the policymaker is not a utilitarian, but rather has a "social welfare function" that is equity-regarding to some degree, then she faces the following choice: Should she care about the equalization of expected well-being (the ex ante approach), or should she care about the expected equalization of actual well-being (the ex post approach)? Should she focus on the equality of prospects or the prospects for equality? In this Article, we bring the ex ante/ex post problem to the attention of legal academics, provide novel insight into when and why the problem arises, and highlight legal applications where the problem figures prominently. We ultimately conclude that welfarism requires an ex post approach. This is a counterintuitive conclusion because the ex post approach can conflict with ex ante Pareto superiority. Indeed, the Article demonstrates that the ex post application of every equity-regarding social welfare function - whatever its particular form - must conflict with ex ante Pareto superiority in some choice situations. Among other things, then, the Article shows that legal academics must abandon either their commitment to welfarism or their commitment to ex ante Pareto superiority.

§ Keywords: Social Welfare, Welfarism, Fairness, Utilitarianism, Consequentialism, Inequality, Equity, Uncertainty, Ex Post Social Welfare, Ex Ante Social Welfare, Cost Benefit Analysis, Pigou-Dalton Principle, Sure Thing Principle, Time Inconsistency, Compensation, Insurance, Tax Policy.

· Deconstructing the New Efficiency Rationale, 86 Cornell L. Rev. 1003 (2001)[4]

§ Abstract: One of the most important developments in law and economics over the last decade has been the emergence and rapid acceptance of a new type of justification for the field's long-time practice of evaluating legal rules solely on the basis of the efficiency criterion. This Article challenges these new arguments. It contends that these arguments are alternatively logically flawed or reliant on untenable assumptions. The article concludes that law and economics' exclusive focus on efficiency continues to lack justification even within the limited purview of modern economic reasoning.

§ Keywords: Tax policy, equity and efficiency, optimal taxation, tax substitution argument, Atkinson and Stiglitz, taxes versus legal rules.

· Taxes versus Legal Rules as Instruments for Equity: A More Equitable View, 29 J. Legal Stud. 797 (2000).

§ Abstract: Law and economic analysis most often evaluates legal rules solely on the basis of the efficiency criterion. The justification usually offered for this exclusive focus on efficiency is that distributive goals are best accomplished through the tax code. This paper adopts the same framework used to formalize this justification and achieves quite different results: It is shown that: 1) even in the presence of an optimally redistributive tax code, any concern for "equity" dictates that legal rules should deviate from efficient standards in a manner that redistributes toward the less-well-off; 2) any showing that differences in taxable attributes such as income or wealth are the dominant components of overall inequality would go only to the direction of the proper equity adjustment to legal rules, not to the fact that some adjustment should be made; and 3) the role of equity adjustments to legal rules is not limited to correcting inequalities that arise within the legal system, but extends to correcting inequalities arising in other areas of the economy.

§ Keywords: Tax policy, equity and efficiency, optimal taxation, tax substitution argument, Atkinson and Stiglitz, taxes versus legal rules.

Enforcement and Evidence

· Detection Avoidance, 81 NYU L. Rev. 1331 (2006)

§ Abstract: In practice, the problem of law enforcement is half a matter of what the government does to catch violators and half a matter of what violators do to avoid getting caught. In the theory of law enforcement, however, although the state's efforts at detection play a decisive role, offenders' efforts at detection avoidance are largely ignored. Always problematic, this imbalance has become critical in recent years as episodes of corporate misconduct spur new interest in punishing process crimes like obstruction of justice and perjury. This article adds detection avoidance to the existing theoretical frame with an eye toward informing the current policy debate. The exercise leads to several conclusions. First, despite recent efforts to strengthen laws governing obstruction and perjury, sanctioning is relatively inefficacious at discouraging detection avoidance. Sanctions send a mixed message to the offender: do less to avoid detection, but to the extent you still do something, do more to avoid detection of your detection avoidance. The article argues that detection avoidance is more effectively deterred through the structural design of evidentiary procedure (inclusive of investigation). Specifically advocated are devices that exploit the cognitive shortcomings of potential avoiders and the strategic instability of their cooperative arrangements, thereby lowering the cost effectiveness of devoting resources to avoiding detection.

§ Keywords: Evidence, Procedure, Criminal Law, Administrative Law, Public Enforcement, Obstruction of Justice, Perjury, Discovery Sanctions, Spoliation, Document Retention Policies, Document Destruction.

§ Web appendix: here.

· Evidence, Procedure, and the Upside of Cognitive Error, 57 Stan. L. Rev. 291 (2004)

§ Abstract: Humans are imperfect information processors, a fact almost universally bemoaned in legal scholarship. But when it comes to how the legal system itself processes information, cognitive limitations are largely good news. Evidentiary procedure - inclusive of trial, discovery, and investigation - relies heavily on the fact that human mental capacity is limited. Such limits are crucial to separating sincere from insincere testimony. Moreover, notes and other "cognitive artifacts" that individuals make to compensate for their limited cognitive ability are an important source of evidence. This article's primary objective is to elucidate the extent to which cognitive imperfection is beneficial rather than detrimental to evidentiary process and thus to law as a whole. Secondarily, the article discusses how the law of evidentiary process tilts the playing field of litigation in a manner that exacerbates the cognitive limitations of the potentially insincere and offsets the limitations of competing participants.

§ Keywords: Evidence, Procedure, Cognitive Error, Cognitive Biases and Illusions, Cross Examination, Witness Preparation, Real Evidence, Eyewitness Memory

· Evidence Tampering, 53 Duke L. J. 1215 (2004)[5]

§ Abstract: Current writing on evidence tampering—inclusive of the destruction, fabrication, and suppression of evidence—creates the impression that our system of litigation is in a state of fundamental disrepair. This article suggests that this perception may merely reflect defects in the conventional view of trial's purpose. The conventional view sees trial as a stand-alone device for uncovering micro-historical truths about what has already come to pass. In contrast, this article advocates viewing trial as but one component of the overall mechanism by which the legal system influences everyday behavior. When trial is viewed less in terms of discerning past events, and more in terms of shaping future events, several apparently troublesome aspects of the existing system's treatment of evidence tampering gain substantial justification, and the way is paved for a more fruitful evaluation of current doctrine.

§ Keywords: perjury, obstruction of justice, contempt, evidence tampering, spoliation, document retention policy, discovery sanctions, Rule 11 sanctions, inherent powers, spoliation tort, professional responsibility

· Character Evidence and the Object of Trial, 101 Colum. L. Rev. 1227 (2001).

§ Abstract: Evidence of an individual's character may not in general be offered to prove that she acted in conformity with that character on a particular occasion. Most analyses of this general rule - and its many exceptions - start from the premise that trial is at heart an exercise in finding facts. Yet a clear and robust rationale for the rules governing character evidence has yet to be found on this basis. This article views trial and character evidence in a different light. Trial is regarded as but one part of the overall mechanism by which the state regulates behavior in the larger world outside the courtroom. The article focuses specifically on trial's role in the provision of incentives that induce individuals to account for the welfare of others in their daily activities. It is shown that the rules governing character evidence are much easier to explain - and so more fruitfully evaluated - when trial is explicitly placed in this broader context. From this finding the article draws the larger lesson that the real object of trial lies more in shaping events than sorting them out after the fact.

§ Keywords: Character evidence, prior acts evidence, impeachment, recidivism, “three strikes,” repeat offenders, rape shield.

· A Primary Activity Approach to Proof Burdens, 37 J. Legal Stud. 273 (2008).

· Abstract: The question of which party should bear the burden of proof on a given factual issue remains one of the most important and problematic in evidence and procedure. This paper approaches the question from a relatively unstudied perspective, viewing litigation as a device for influencing primary activity behavior rather than as a standalone search for truth. Its main finding is as follows: when a given evidentiary contest concerns the primary activity behavior of one of the parties, placing the burden of proof on the other party maximizes the incentive impact of that contest. Though counterintuitive, the finding accords with a striking regularity in existing law. The adversary of the incentive target typically does bear the burden of proof with regard to the target's primary activity behavior. Thus, in tort, the plaintiff bears the burden on the defendant's negligence, but the defendant typically bears the burden on the defense that the plaintiff was contributorily negligent. And in contract the plaintiff bears the burden on the defendant's nonperformance, while the defendant bears the burden of proof on his defense that the plaintiff failed to perform.

· Keywords: Burden of Proof, Burden of Production, Burden of Persuasion, Procedure, Evidence, Litigation

· Evidentiary Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance, 74 J. L. Econ. & Org. 72 (2008) (with G. Triantis).

· Abstract: Contract theory identifies verifiability as a critical determinant of the incompleteness of contracts. Although verifiability refers to the cost of proving relevant facts to a court, very little scholarship connects explicitly the evidentiary process to the drafting of substantive contract terms. This paper begins to explore this relationship to provide a more rigorous explanation of contract design. In particular, the paper concerns the very core of verifiability - truth-finding by a court - and examines the impact of the prospect of evidence fabrication on contracting. It thereby also explores the puzzling tolerance of the adjudicatory system for fabrication and the incentives to fabricate created by thresholds in burdens of proof. The paper suggests that, despite undermining truth-finding, evidence fabrication may be harnessed by contracting parties to improve the (evidentiary) cost-efficiency of performance incentives in their relationship.

· Keywords: Verifiability, contracting, contract design, evidence, fabrication, perjury, evidence destruction.

· Should Plaintiffs Win What Defendants Lose? Litigation Stakes, Litigation Effort, and the Benefits of Decoupling, 33 J. Legal Stud. 323 (2004) (with A. Choi)

· Abstract: Professors Polinsky and Che advocate decoupling what plaintiffs recover from what defendants pay in damages, specifically arguing that lowering recovery and raising damages (by appropriate amounts) delivers the same level of primary activity deterrence with fewer filed suits. Professors Kahan and Tuckman extend Polinsky and Che's analysis to account for the effect of parties' litigation stakes on the cost of each filed suit, provisionally concluding that Polinsky and Che's basic argument remains intact. This article reaches a different conclusion. We show that when the effect of litigation stakes on litigation effort is more fully taken into account, lowering recovery and raising damages may no longer improve social welfare. In addition, we characterize the kinds of suits in which the optimal level of recovery is no less than the optimal level of damages. Of rhetorical significance in the current policy debate, we find that such suits resemble the negative picture of modern litigation invoked by some advocates of reduced recovery. Our basic findings are robust to the possibility of out-of-court settlement, plaintiffs' employment of contingent fee lawyers, and alternative fee-shifting rules.

· Keywords: Decoupling, litigation, procedure, litigation effort, optimal damages, optimal penalties, optimal recovery, punitive damages, split awards.

· Relying on the Information of Interested—and Potentially Dishonest—Parties, 3 Am. L. & Econ. Rev. 320 (2001).

· Abstract: This paper investigates the role of evidence production in the regulation of private behavior via judicial and administrative process. The paper presents a model in which the law makes the agent's fine depend on the presentation of evidence whose production cost, in turn, depends on how the agent has behaved in the regulated activity. The targeted behavior becomes more privately beneficial to the agent to the extent that it reduces the agent's evidence costs and so improves its highest obtainable payoffs (net of costs) at the subsequent hearing. This view of evidence production has several notable implications, including that truth-finding has no direct role in deterrence, that non-falsifiable evidence, even when available, is unlikely to be the best choice for the system, and that "overdeterrence" may well be cost effective.

· Keywords: litigation, procedure, evidence, evidence production, signaling, screening, primary activity approach, deterrence, endogenous cost evidence, endogenous signal costs, truth-finding, overdeterrence.

· Games, Information and Evidence Production: With Application to English Legal History, 2 Am. L. & Econ. Rev. 342 (2000).

· Abstract: I study the problem of how the legal system regulates activity outside the courtroom on the basis of information supplied, in court, by interested and potentially dishonest parties. I then apply the framework to the historical evolution of Civil Procedure.

I identify a trade-off between the "fixed costs" of holding hearings and the cost of evidence produced therein. When a party's presentation of evidence is used to set its own liability or recovery, such evidence is useful in setting incentives only to the extent that the party's evidence production costs tend to vary with its behavior in the regulated activity. Such production costs are a loss to the system. The less intense an individual's interest in how her information will be used, the less the need for production costs in insuring reliability. But greater reliance on information from others requires increasing the breadth of circumstances triggering suit and the number of parties to each action.

An increase in the cost of legal process (both fixed costs and production costs) warrants increased reliance on the information supplied by interested parties via costly evidence production. This suggests that increases in the opportunity cost of process, due to increases in labor productivity, were one factor in the gradual shift through English legal history from a system relying mostly on relatively disinterested observers (in the form of the ancient jury) to one relying mostly on costly evidence production by the parties themselves.

· Keywords: litigation, procedure, evidence, evidence production, signaling, screening, correlated types, primary activity approach, deterrence, endogenous cost evidence, endogenous signal costs, truth-finding, history of jury’s role.

· The Burden of Proof in Civil Litigation: A Simple Model of Mechanism Design, 17 Int'l Rev. L. & Econ. 431 (1997).

· Finding Error, 2003 Mich. St. L. Rev. 1189 (2004) (in Symposium: Visions of Rationality in Evidence Law)

· The Economics of Evidence, Procedure, and Litigation: Vol. I (2007), introduction available for download at SSRN Author page.

· The Economics of Evidence, Procedure, and Litigation: Vol. II (2007), introduction available for download at SSRN Author page

· Harnessing Adversarial Process: Optimal Strategic Complementarities in Litigation (U. Pa., Inst. L. & Econ. Res. Paper Series, No. 05-01, January 2005) (This draft: January 2006), available for download at SSRN Author page.

· Enforcement by Hearing: An Integrated Model of Evidence Production (USC CLEO Working Paper No. 98-19, 1998/Colum. Econ. Dept. Discussion Paper No. 9798-05, 1998),[6] available for download at SSRN Author page.

Social norms and law

· Norms, Repeated Games, and the Role for Law, 91 Cal. L. Rev. 1281 (2003) (with Paul Mahoney)

· Competing Norms and Social Evolution: Is the Fittest Norm Efficient?, 149 U. Pa. L. Rev. 2027 (2001) (with Paul Mahoney).

Public Economics

· Big Field, Small Potatoes: An Empirical Assessment of EPA’s Self-Audit Policy, 23 J. Pol’y Analysis & Mgmt. 415 (2004) (with A. Pfaff)

· Environmental Self-Auditing: Setting the Proper Incentives for Discovering and Correcting Environmental Harm, 16 J. L. Econ. & Org. 189 (2000) (with A. Pfaff).

· General and Specific Legal Rules, 161 J. Inst. & Theor. Econ. 329 (2005) (with P. Mahoney)

Game Theory

· A Probabilistic Model of Learning in Games, 64 Econometrica 1375 (1996).

· Collusion and Price Rigidity, 71 Rev. Econ. Stud. 317 (2004) (with S. Athey & K. Bagwell)

· Minimal Inclusive Sets in Special Classes of Games, (Colum. Dept. Econ. Discussion Paper No. 9798-11, 1997),[7] available for download at SSRN Author page.

Mathematical Probability Theory

· The Role of Absolute Continuity in ‘Merging of Opinions’ and ‘Rational Learning,’ 29 Games & Econ. Beh. 170 (1999) (with R. Miller).

· Almost Everybody Disagrees Almost All the Time: The Genericity of Weakly-Merging Nowhere, (accepted subject to revision at J. Econ. Theory ) (1997) (with R. Miller), available for download at SSRN Author page.

Teaching

by subject area

Law

Taxation

· Federal Income Taxation (Penn Law: fall 2009; spring 2008; spring 2007; UVA Law: spring 2000, 2002)

· Taxation of Business Entities (Penn Law: spring 2010; fall 2008)

· International Taxation (Penn Law: spring 2009)

· Tax Policy (Penn Law: spring 2010; fall 2008; spring 2007; fall 2007)

Evidentiary Procedure

· Evidence (Penn Law: fall 2003, spring 2005, spring 2006, fall 2006, fall 2007; NYU Law: fall 2005; Chicago Law: fall 2004; UVA Law: fall 1999, spring 2001, spring 2003)

· Civil Procedure (USC Law: fall 1998; UVA Law: fall 2000, 2001; Penn Law: fall 2002)

· Advanced Topics in Procedure and Evidence (Penn Law: fall 2003, spring 2005, spring 2006; UVA Law: spring 2003; Columbia Law: spring 1996)

Law and economics

· Law and Economics (Penn Law: spring 2004; UC Berkeley Jurisprudence and Social Policy (JSP) Undergrad. Prog.: fall 1994; Stanford Econ. Dept. Undergrad. Prog.: spring 1995)

Game Theory, Economics & Mathematics

· Game Theory for Ph.D.’s (Columbia Econ. Dept. Grad. Prog.: spring 1996, 1997, 1998)

· Game Theory for Policy Makers (Program in Econ. Policy Management (PEPM) at Columbia Univ.’s School of International & Public Affairs (SIPA): fall 1995, 1996, spring 1998)

· Intermediate Microeconomics (Columbia Econ. Dept. Undergrad. Prog.: fall 1997 (two classes))

· Mathematical Methods for Policy Makers (Program in Econ. Policy Management (PEPM) at Columbia Univ.’s School of International & Public Affairs (SIPA): summer 1996, 1997, 1998)

· Mathematical Methods for Ph.D.’s (Yale Econ. Dept. Grad. Prog.: fall 1993)

[3] Originally entitled Taxes, Equity, and Work Hours.

[4] Entitled in draft The New Efficiency Rationale: An Internal Critique and incorporating in Part III the working paper Inequity and Distortion: The Continuing Debate on Equity and Efficiency in the Law (A Counter-Response to Professors Kaplow and Shavell).

[5] Entitled in draft Shredders, Fibbers, and Forgers: Evidence Tampering on the Object of Trial.

[6] Originally circulated as part of Enforcement by Hearing: How the Civil Law Sets Incentives (Colum. Econ. Dept. Discussion Paper No 95-9603, 1995) and containing technical arguments referenced in Relying on the Information of Interested—and Potentially Dishonest—Parties, supra.

[7] Containing technical arguments referenced in A Probabilistic Model of Learning in Games, supra.