Is Local Consumer Protection Law a Better Redistributive Mechanism Than the Tax System?

This Essay, prepared as a contribution to the 2009 NYU Annual Survey of American Law Symposium on Preemption and Tort Law, takes issue with the standard position in the law and economics literature that substantive consumer-protection rules should not be used to redistribute wealth. Models of that position, I argue, have so far assumed the existence of only one sovereign. However, in a more realistic world where there is both local and national government, it is possible that redistribution through local tort or contract law is superior to either national or local redistributive taxation. The heart of the argument is that, while non-tax distribution at all levels is subject to a double distortion problem, redistributive taxes in a federal system also have problems not taken into account in the standard model. Taxation at the national level cannot fully capture social preferences for redistribution. At the same time, attempts to enact redistributive taxes at the local level give rise to deadweight losses from inter-jurisdictional tax competition. Redistributive local legal rules allow better incorporation of local preferences for redistribution, while reducing deadweight losses. The deadweight losses of legal rules are potentially smaller because legal rules are more like "benefit taxation": firms cannot exploit the benefits of the market jurisdiction without exposing themselves to the corresponding legal rules. Thus, my argument has implications not only for decisions whether to preempt local consumer protection laws, but also for the design of legal systems more generally. I concede, however, that theory is ambiguous as to whether redistributive local legal rules in fact increase welfare; my only argument is that current assumptions to the contrary must be tested empirically