The University of Chicago Law School Faculty Blog

Student Blogger - Adaptive Preferences and the Deliciousness of Equal Rights

A Thirsty fox once saw some fine
Ripe grapes that hung on a tall vine
“Just what I’m longing for!” cried he,
And sprang to get them eagerly.
Alas! the clusters hung so high,
He could not reach them. By and by,
Finding his efforts all in vain,
His longing turned into disdain;
“They’re only fit,” snarled he, “for Apes.
What do I want with sour grapes!”

- The Hereford Aesop

A prominent argument against a moral framework oriented around preference satisfaction is that preferences are prone to distortion due to one’s situation.  The fox, asked about his preference for grapes at the end of his efforts-all-in-vain, reports an affirmative distaste for them.  A welfarist, it is argued, who sought the best allocation of fruits among the attendees at the forest animal cocktail party, would find nothing wrong in allocating no grapes to the fox, based on this revealed distaste.  So the fox is deprived of grapes he doesn’t want, so what? 

A non-Aesop example of this phenomenon—commonly termed “adaptive preferences”—might be the case of women who have become accustomed to life in a culture that subjects them to systematic oppression.  What response is appropriate if these women report that they have no preference for greater autonomy or more equal rights? 

Professor David Weisbach, speaking with the Law & Philosophy Workshop, argued that phenomena that look like adaptive preferences can readily be explained within the welfarist framework as stable preferences under changed circumstances.  In general, this looks a lot like learning, a phenomenon for which the welfarist has developed analytical tools.

David Weisbach Analyzes the Taxation of Carried Interests in Private Equity

David Weisbach, Walter J. Blum Professor of Law and Kearney Director of the Program in Law and Economics, recently posted this paper to SSRN. The abstract is below.

The Taxation of Carried Interests in Private Equity

DAVID A. WEISBACH
University of Chicago Law School
Virginia Law Review, 2007
U of Chicago Law & Economics, Olin Working Paper No. 365

Abstract:    
This essay analyzes the tax treatment of carried interests in private equity. It argues that there are two competing analogies: service income and investment income. Standard approaches are not able to resolve which of the competing analogies is better and often fail even to recognize that there are competing analogies. The best method for determining the proper treatment of carried interests is through direct examination of the effects of each of the possible treatments, known as the theory of line drawing in the tax law. From this approach, it is clear that the better treatment of holders of carried interests is as investors. Key pieces of evidence include the longstanding policy premises behind partnership taxation and the complexity and avoidance problems with attempts to tax carried interests as service income.

Weisbach: Consumption Taxation is Still Superior to Income Taxation

Chicago's David Weisbach (with Joseph Bankman of Stanford) recently posted  a paper entitled "Consumption Taxation is Still Superior to Income Taxation" on SSRN.  The paper responds to a forthcoming Stanford Law Review article NYU's Daniel Shaviro criticizing consumption tax proposals. The abstract is below (an early version of Shaviro's paper is also available).   

Consumption Taxation is Still Superior to Income Taxation
DAVID A. WEISBACH  
University of Chicago Law School
JOSEPH BANKMAN
Stanford Law School

This essay responds to an article by Daniel Shaviro which argues in part that the failure of empirical assumptions behind the permanent income hypothesis undermines the case for preferring consumption taxation over income taxation. We consider each of Shaviro's arguments and conclude that none change the basic considerations in favor of consumption taxation in any significant way. Shaviro concludes that administrability and implementation concerns should be central to the choice of the tax base and that these concerns are likely to point to taxing consumption. We agree with this conclusion.