Is cap-and-trade fair to the poor? Shortsighted households and the timing of consumption taxes

George Washington Law Review

Volumn 79, Issue 1, 2010, Pages 33-100

  Galle, Brian ^a   Utset, Manuel ^b  

^a BOSTON COLLEGE   (United States)

^b FLORIDA STATE UNIVERSITY   (United States)

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EID: 79956352607     PISSN: 00168076     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (524)

1. For an overview of the scientific consensus on the dangers of climate change, see INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, SPECIAL REPORT ON EMISSIONS SCENARIOS (2000)
2. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 2007
3. THE PHYSICAL SCIENCE BASIS (2007)
4. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, CLIMATE CHANGE 2007
5. IMPACTS, ADAPTATION AND VULNERABILITY (2007) [hereinafter IMPACTS].
6. Rumi Shammin & Clark W. Bullard, Impact of Cap-and-Trade Policies for Reducing Greenhouse Gas Emissions on U.S. Households, 68 ECOLOGICAL ECON. 2432, 2436 (2009).
7. IMPACTS, supra note 1, at 19.
8. Gilbert E. Metcalf & David Weisbach, The Design of a Carbon Tax, 33 HARV. ENVTL. L. REV. 499, 516 (2009)
9. Gilbert E. Metcalf, A Proposal for a U.S. Carbon Tax Swap: An Equitable Tax Reform to Address Global Climate Change 16 (Brookings Inst., Discussion Paper No. 2007-12, 2007), available at http://www.brookings.edu/~/media/files/ rc/papers/2007/10carbontax-metcalf/10-carbontax-metcalf.pdf.
10. Terry Dinan & Diane Lim Rogers, Distributional Effects of Carbon Allowance Trading: How Government Decisions Determine Winners and Losers, 55 NAT'L TAX J. 199, 206 (2002)
11. Metcalf & Weisbach, supra note 4, at 514 n.66 (endorsing Metcalf's earlier proposal)
12. Metcalf, supra note 4, at 11-20
13. see also David A. Super, From the Greenhouse to the Poorhouse: Carbon Emissions Control and the Rules of Legislative Joinder, 158 U. PA. L. REV. 1093, 1190-96 (2010) (presenting and discussing proposals to "offset the regressive effects of higher energy costs").
14. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. § 764 (2009)
15. CONG. BUDGET OFFICE, CONGRESSIONAL BUDGET OFFICE COST ESTIMATE: H.R. 2454 AMERICAN CLEAN ENERGY AND SECURITY ACT OF 2009, at 20 (2009).
16. ANDREU MAS-COLELL ET AL., MICROECONOMIC THEORY 187-88 (1995).
17. Id. at 186.
18. Id. at 187-88.
19. An exception is David Super, who briefly acknowledges that poor households may face higher energy costs during different parts of the year that borrowing cannot satisfy. See Super, supra note 5, at 1185-87.
20. He urges policymakers to target assistance to those times. Id. Although we adopt the common lingo in terming these levies a "carbon tax," most proposals would also include taxes on the production of greenhouse gases other than carbon dioxide. Metcalf, supra note 4, at 12.
21. See CONG. BUDGET OFFICE, TRADE-OFFS IN ALLOCATING ALLOWANCES FOR CO2 EMISSIONS 2 tbl.1 (2007) (estimating costs of a 15% reduction in carbon emissions for median households at $960, or $1184 in 2009 dollars)
22. ROBERT GREENSTEIN ET AL., CTR. ON BUDGET & POL'Y PRIORITIES, DESIGNING CLIMATE-CHANGE LEGISLATION THAT SHIELDS LOW-INCOME HOUSEHOLDS FROM INCREASED POVERTY AND HARDSHIP 1-2 (2008), available at http://www.cbpp.org/ files/10-25-07climate.pdf (putting estimated cost for lowest quintile of homes at $750 and increasing over time)
23. Dinan & Lim Rogers, supra note 5, at 212 tbl.4 (estimating the average household cost for a 15% reduction at $1209, or $1488 in 2009 dollars).
24. All 2009 dollar calculations are by your present authors; for inflation calculations, see THE INFLATION CALCULATOR, http://www.westegg.com/inflation (last visited Sept. 26, 2010).
25. See infra Part II.A.2.
26. We are not the first to observe that credit markets and the timing of taxation can affect social welfare. See Lee Anne Fennell & Kirk J. Stark, Taxation over Time, 59 TAX L. REV. 1, 34 (2005) ("[B]ehavioral factors and capital market imperfections limit the ability of taxpayers to fully smooth consumption."). We build on Fennell and Stark's work by adding, for the first time in the legal literature, a comprehensive survey of the evidence in support of their claim that there are failures in the market for credit for low-income households. We also explain how those failures affect the design of consumption taxes. Stark and Fennell limit their discussion to the income tax.
27. For discussion of the points in this paragraph, see infra Part II.B.
28. See infra notes 100-09 and accompanying text.
29. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. § 431 (2009).
30. Michael J. Graetz, 100 Million Unnecessary Returns: A Fresh Start for the U.S. Tax System, 112 YALE L.J. 261, 288 (2002).
31. For discussion of this paragraph, see infra Part III.
32. See infra Part IV.
33. Paul Ekins & Terry Barker, Carbon Taxes and Carbon Emissions Trading, in ISSUES IN ENVIRONMENTAL ECONOMICS 75, 77-79 (Nick Hanley & Colin J. Roberts eds., 2002)
34. Nicholas Bull et al., Who Pays Broad-Based Energy Taxes? Computing Lifetime and Regional Incidence, 15 ENERGY J. 145, 147 (1994).
35. That is, the carbon tax is a "Pigouvian" tax, a levy priced according to the size of the negative externality the product creates for others. Bull et al., supra note 20, at 147.
36. See infra Part III.C.
37. See infra Part IV.
38. Our methodology here owes an obvious debt to RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 105-20 (2009).
39. For a survey, see infra Part I.B.
40. JONATHAN GRUBER, PUBLIC FINANCE AND PUBLIC POLICY, at G-11 (2d ed. 2007).
41. In addition, virtually all ethical systems agree that welfare has at least some moral weight. Mark Kelman, Hedonic Psychology and the Ambiguities of "Welfare," 33 PHIL. & PUB. AFF. 391, 391 (2005).
42. See MATTHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COST-BENEFIT ANALYSIS 25 (2006) (explaining that a welfarist decision procedure "is a rough-and-ready proxy for overall well-being").
43. See generally THE WORKS OF JEREMY BENTHAM (John Bowring ed., 1962).
44. See LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE 16 (2002).
45. There is some controversy on whether subjective preference satisfaction is the best measure of an individual's well-being. See generally ADLER & POSNER, supra note 28, at 29-35 (sketching the controversy).
46. Lawrence B. Solum, To Our Children's Children's Children: The Problems of Intergenerational Ethics, 35 LOY. L.A. L. REV. 163, 192-93 (2001) (same).
47. Some scholars argue instead that simple happiness is the best measure. John Bronsteen et al., Welfare as Happiness, 98 GEO. L.J. 1583 (2010)
48. Others maintain that, in light of the possibility that people will not choose what is best for themselves, the better metric would be the extent to which society achieves a more objective view of the good life. See generally Amartya Sen, Capability and Well- Being, in THE QUALITY OF LIFE 30 (Martha C. Nussbaum & Amartya Sen eds., 1993).
49. Although both these views have points in their favor, neither is mainstream among policy analysts. See ADLER & POSNER, supra note 28, at 29 (noting that "many welfare economists" adopt "the simple preference-based account"). Thus, this Article will generally take welfare to mean the satisfaction of subjective preferences.
50. ADLER & POSNER, supra note 28, at 23.
51. KAPLOW & SHAVELL, supra note 30, at 17, 21, 31.
52. On the indifference of utilitarians to distribution, see Solum, supra note 30, at 191-93.
53. Some welfarists also distinguish themselves from Bentham on the grounds that Bentham believed utility should be measured according to happiness rather than satisfaction of preferences. See ADLER & POSNER, supra note 28, at 29-32.
54. See David W. Pearce, Framework for Assessing the Distribution of Environmental Quality, in THE DISTRIBUTIONAL EFFECTS OF ENVIRONMENTAL POLICY 23, 62-63 (Yse Serret & Nick Johnstone eds., 2006) (describing how the SWF takes account of preferences for fairness).
55. See KAPLOW & SHAVELL, supra note 30, at 17
56. Dale W. Jorgenson et al., Carbon Taxes and Economic Welfare, in BROOKINGS PAPERS ON ECONOMIC ACTIVITY: MICROECONOMICS 1992, at 393, 396 (Martin Neil Baily & Clifford Winston eds., 1992).
57. GRUBER, supra note 26, at 29-30.
58. ADLER & POSNER, supra note 28, at 23. We qualify the language in the text because most welfarists argue that redistribution also creates transaction costs, such as the possibility that taxes on high earners might discourage work.
59. See, e.g., Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667, 680-81 (1994).
60. Martin Browning & Annamaria Lusardi, Household Saving: Micro Theories and Micro Facts, 34 J. ECON. LITERATURE 1797, 1799-800 (1996)
61. see also Lee Anne Fennell, Taxing Willpower 8 (Dec. 4, 2008) (unpublished manuscript), available at http://www.law.columbia.edu/null/download? &exclusive=filemgr.download&file-id=162354.
62. See Browning & Lusardi, supra note 37, at 1800.
63. See Fennell & Stark, supra note 13, at 12.
64. Daniel Shaviro, Beyond the Pro-Consumption Tax Consensus, 60 STAN. L. REV. 745, 770 (2007).
65. See GRUBER, supra note 26, at 288.
66. See Henrik Klinge Jacobsen et al., Distributional Implications of Environmental Taxation in Denmark, 24 FISCAL STUD. 477, 478 (2003) ("[M]any households with low current incomes are students or pensioners with higher lifetime income.").
67. Barbara H. Fried, Fairness and the Consumption Tax, 44 STAN. L. REV. 961, 961 (1992).
68. -44 WALTER HELLERSTEIN ET AL., STATE AND LOCAL TAXATION: CASES AND MATERIALS 605-14 (9th ed. 2009).
69. A point worth noting for any "tax geeks" among our readers is that we use the term "consumption tax" to refer to what is more technically known as a "transactional consumption tax." George K. Yin, Accommodating the "Low Income" in a Cash-Flow or Consumed Income Tax World, 2 FLA. TAX REV. 445, 450 (1995).
70. The transactional tax should be distinguished from a "cash-flow consumption tax," which is simply a consumption tax collected out of income, i.e., an income tax with a deduction for savings. Id. at 451-52.
71. The timing mismatches we alluded to in the Introduction are perhaps avoidable under a cash-flow consumption tax. For one thing, a cash-flow consumption tax could achieve progressivity by changing its rate structure. See Joseph Bankman & David A. Weisbach, The Superiority of an Ideal Consumption Tax over an Ideal Income Tax, 58 STAN. L. REV. 1413, 1428-30 (2006).
72. Dinan & Lim Rogers, supra note 5, at 209.
73. GREENSTEIN ET AL., supra note 11, at 1; Dinan & Lim Rogers, supra note 5, at 210
74. Daniel R. Feenberg et al., Distributional Effects of Adopting a National Retail Sales Tax, 11 TAX POL'Y & ECON. 49, 86 (1997)
75. Yin, supra note 44, at 459.
76. Poor households also spend a higher portion of their incomes on carbon-intensive products. Shammin & Bullard, supra note 2, at 2436.
77. Cf. JOSEPH M. DODGE, THE LOGIC OF TAX: FEDERAL INCOME TAX THEORY AND POLICY 88 (1989) (discussing vertical equity and how fairness concerns allow for different tax treatment for differently situated persons).
78. John C. Harsanyi, Cardinal Utility in Welfare Economics and in the Theory of Risk- Taking, 61 J. POL. ECON. 434, 435 (1953).
79. See GRUBER, supra note 26, at 29-30.
80. Donald Bruce & William F. Fox, E-Commerce in the Context of Declining State Sales Tax Bases, 53 NAT'L TAX J. 1373, 1375-76 (2000)
81. Robert F. van Brederode, Introduction to the U.S. States Sales and Use Taxes, 19 INT'L VAT MONITOR 270, 271-72 (2007).
82. See Richard Thompson Ainsworth, Biometrics: Solving the Regressivity of VATs and RSTs with "Smart Card" Technology, 7 FLA. TAX REV. 651, 656-57 & nn.8-9 (2007) (surveying U.S. sales tax and European VAT exemptions).
83. See William J. Turnier, Designing an Efficient Value Added Tax, 39 TAX L. REV. 435, 438-39 (1984).
84. A "flat tax," as proposed by Robert Hall and Alvin Rabushka, takes a VAT-like approach in exempting some income from any tax; for a family of four, they suggest the first $25,500 in earnings would be untaxed. ROBERT E. HALL & ALVIN RABUSHKA, THE FLAT TAX 59 (2d ed. 1995).
85. Robert E. Hall, Guidelines for Tax Reform: The Simple, Progressive Value-Added Consumption Tax, in TOWARD FUNDAMENTAL TAX REFORM 70, 73 (Alan J. Auerbach & Kevin A. Hassett eds., 2005).
86. See Graetz, supra note 17, at 290-91
87. see also Joseph Bankman & Thomas Griffith, Social Welfare and the Rate Structure: A New Look at Progressive Taxation, 75 CAL. L. REV. 1905, 1908 n.5 (1987) (explaining the use of "demogrants" to achieve a desirable level of progressivity in a tax system with regressive rates). The most significant component of payroll taxes is the Social Security tax, which is a flat 6.2% assize on the first $106,000 or so of salary received by the employee, plus an additional 6.2% tax on each dollar of salary paid by the employer.
88. I.R.C. §§ 3101, 3111 (2006)
89. -42 U.S.C. § 430 (2006) (authorizing the Commissioner of Social Security to determine the amount of wages subject to the Social Security tax)
90. Social Security and Medicare Taxes, IRS.GOV, http://www.irs.gov/ formspubs/article/0id=177943,00.html (noting the cap amount for 2009 and 2010). Medicare taxes add an additional 1.45% on each side for a total of 15.3%. I.R.C. §§ 3101(b), 3111(b). For a helpful overview of the Social Security tax system, see Jonathan B. Forman, Making Social Security Work, 65 OHIO ST. L.J. 145, 149-55 (2004).
91. See generally Yin, supra note 44, at 466-90 (evaluating tax proposals to accommodate low-income people). Yin, however, is skeptical that these proposals are worth pursuing.
92. Id. At 490-91.
93. Paul Bachman et al., Taxing Sales Under the FairTax: What Rate Works?, 113 TAX NOTES 663, 668 (2006) (prebate)
94. David R. Burton & Dan R. Mastromarco, Emancipating America from the Income Tax: How the National Sales Tax Would Work, CATO INST., n.42 (Apr. 15, 1997), http://www.cato.org/pubs/pas/pa-272.html (rebate).
95. Legislators can design a cap-and-trade mechanism to be economically equivalent to a carbon tax. See Ekins & Barker, supra note 20, at 79-80.
96. A carbon tax imposed on energy producers usually consists of a set price per unit of carbon emitted by the producer. See Metcalf, supra note 4, at 14.
97. Under cap-and-trade, energy producers must acquire a permit in order to produce each unit of carbon. See Super, supra note 5, at 1106-07.
98. Since there are a limited number of permits available, if permits are tradeable, the market will determine a price for each unit of carbon. See id. at 1107
99. see also Dinan & Lim Rogers, supra note 5, at 202-03 (illustrating the effects of carbon restrictions on the market). The government can set the number of available permits so that, at equilibrium, the market price per unit will be the same as it would be under a direct carbon tax. With that said, there are design differences between the two models.
100. See Metcalf, supra note 4, at 22-27 (arguing that a carbon tax is superior to cap-and-trade)
101. cf. Ethan Yale, Taxing Cap-and-Trade Environmental Regulation, 37 J. LEGAL STUD. 535, 548 (2008) (explaining that corporate income taxes may distort the intended carbon-abatement properties of a cap-and-trade regime). These differences, however, are not pertinent to our discussion. We note, though, that the conventional analysis of the choice between carbon taxes and capand- trade depends on the information available to policymakers.
102. GRUBER, supra note 26, at 143-46. To the extent that behavioral responses to different forms of carbon pricing introduce new uncertainties, these responses might also alter the choice between pricing instruments. We are grateful to Mitchell Kane for this point.
103. See Metcalf, supra note 4, at 18 (modeling but not endorsing this approach). Despite the rebate, consumers would still have incentives to reduce their use of carbon-intensive products. Since everyone receives the same rebate, but taxes depend on carbon usage, households that do a better job reducing their carbon footprint will end the year with more money.
104. Shammin & Bullard, supra note 2, at 2437.
105. See Metcalf & Weisbach, supra note 4, at 513-14 & n.66 (citing Metcalf, supra note 4, at 14).
106. See John A. Brittain, The Incidence of Social Security Payroll Taxes, 61 AM. ECON. REV. 110, 111 (1971)
107. Jonathan Gruber, The Incidence of Payroll Taxation: Evidence from Chile, 15 J. LAB. ECON. S72, S78-79 (1997).
108. Metcalf, supra note 4, at 14.
109. Gilbert E. Metcalf, A Distributional Analysis of Green Tax Reforms, 52 NAT'L TAX J. 655, 663 (1999).
110. Metcalf & Weisbach, supra note 4, at 516; Metcalf, supra note 4, at 16.
111. Metcalf, supra note 4, at 16.
112. Id.
113. see also Dinan & Lim Rogers, supra note 5, at 213 tbl.6 (estimating the distributional effects of various rebate models)
114. Dallas Burtraw et al., The Incidence of U.S. Climate Policy: Alternate Uses of Revenues from a Cap-and-Trade Auction 2, 19 (Res. for Future, Discussion Paper No. 09-17-REV, 2009) (projecting that several versions of a carbon tax rebate could be distributionally neutral, but finding that a payroll tax rebate might not).
115. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. § 431 (2009) (adding a new § 2201(d) to the Social Security Act).
116. Id.
117. Of course, it is possible that the family could prepay its rent or purchase some durable goods and, in that way, improve its standard of living for subsequent months. Purchase of durable goods, in effect, is a form of savings. But let us rule out durable-goods purchases to be true to the spirit of our hypothetical.
118. Burton & Mastromarco, supra note 56, at n.42 (discussing rebates).
119. Bachman et al., supra note 56, at 668 (discussing prebates).
120. See infra text accompanying notes 172-86.
121. See infra Part II.A.1.
122. See infra Part II.A.2.
123. See David B. Gross & Nicholas S. Souleles, Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data, 117 Q.J. ECON. 149, 179-81 (2002).
124. See supra Part I.A.
125. See GRUBER, supra note 26, at 288 (describing obstacles to borrowing against future earnings potential).
126. Angela Littwin, Beyond Usury: A Study of Credit-Card Use and Preference Among Low-Income Consumers, 86 TEX. L. REV. 451, 460 (2008)
127. see also Tullio Jappelli et al., Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources, 80 REV. ECON. & STAT. 251, 252 (1998) (explaining that "sample splits based on wealth are bound to be highly imperfect because assets and asset income are often poorly measured").
128. See David S. Johnson et al., The Response of Consumer Spending to Rebates During an Expansion: Evidence from the 2003 Child Tax Credit 2 (Apr. 2009) (unpublished manuscript), available at http://finance.wharton.upenn.edu/ ~souleles/research/papers/JPSChildTaxCreditApril 2009.pdf. Until relatively recently, studies of liquidity constraints were largely inconclusive, owing to problems in the available data and difficulties in sorting cause from effect.
129. See Browning & Lusardi, supra note 37, at 1833-34 (critiquing earlier studies on these grounds)
130. Angela C. Lyons, How Credit Access Has Changed over Time for U.S. Households, 37 J. CONSUMER AFF. 231, 232-33 (2003) (same)
131. Nicholas S. Souleles, The Response of Household Consumption to Income Tax Refunds, 89 AM. ECON. REV. 947, 947-48 (1999) (same).
132. Sumit Agarwal et al., The Reaction of Consumer Spending and Debt to Tax Rebates- Evidence from Consumer Credit Data, 115 J. POL. ECON. 986, 987 (2007)
133. David S. Johnson et al., Household Expenditures and the Income Tax Rebates of 2001, 96 AM. ECON. REV. 1589, 1589 (2006)
134. Matthew D. Shapiro & Joel Slemrod, Consumer Response to Tax Rebates, 93 AM. ECON. REV. 381, 381 (2003)
135. Souleles, supra note 78, at 947
136. Shawn A. Cole et al., Where Does It Go? Spending by the Financially Constrained 1 (Harv. Bus. Sch., Working Paper No. 08-083, 2008)
137. Julia Lynn Coronado et al., The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data 1 (Fed. Res. Bd., Working Paper No. 2005-32, 2005)
138. Claudia R. Sahm et al., Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications 1 (Fed. Res. Bd., Working Paper No. 2009-45, 2009)
139. Christian Broda & Jonathan Parker, The Impact of the 2008 Tax Rebates on Consumer Spending: Preliminary Evidence 1-2 (July 29, 2008) (unpublished manuscript), available at http://faculty.chicagobooth.edu/christian.broda/ website/research/unrestricted/Stimulus%20Payments%20and%20Spending.pdf.
140. See Johnson et al., supra note 79, at 1595. In some situations, this prediction is not as robust.
141. See Browning & Lusardi, supra note 37, at 1801.
142. Johnson et al., supra note 79, at 1597
143. Sahm et al., supra note 79, at 6, 14-15
144. Broda & Parker, supra note 79, at 3
145. Johnson et al., supra note 78, at 9-10.
146. Johnson et al., supra note 79, at 1603, 1604 tbl.5
147. Souleles, supra note 78, at 956
148. Coronado et al., supra note 79, at 12
149. Broda & Parker, supra note 79, at 3
150. Johnson et al., supra note 78, at 14.
151. But see Shapiro & Slemrod, supra note 79, at 385 (finding that poorer households were less likely to spend their rebate than others). Sahm et al. find a more complex pattern in which poorer households spent faster but over time spent less of their rebate than the richest.
152. Sahm et al., supra note 79, at 6-7, 10-11. The contrary results may be explainable as an aspect of debt burdens. Shapiro and Slemrod find that paying off debt far exceeded either spending or saving for all categories of respondents.
153. Shapiro & Slemrod, supra note 79, at 385 tbl.2. Paying off debt may be more important for low-income households. Since these households have difficulty saving, maintaining an open line of credit is vital to them in surviving future crises.
154. See ANGUS DEATON, UNDERSTANDING CONSUMPTION 197 (1992) ("The precautionary motive for saving . . . is strengthened by the existence of liquidity constraints."). Thus, paying off debt is a form of saving for future liquidity needs.
155. Cf. Johnson et al., supra note 78, at 14 n.19 (arguing that some observed data can also be explained by the fact that poor households need to accumulate a "buffer stock" of savings in the event of future crises). This story implies that debt repayment is itself evidence that households expect themselves to be liquidity-constrained in the future.
156. Cf. Gross & Souleles, supra note 74, at 153 (arguing that borrowers' refusals to use all of their credit limits is evidence of liquidity constraints where it is motivated by fear that credit will be needed more urgently in the future).
157. See Coronado et al., supra note 79, at 1.
158. That is, Coronado et al. find no difference in the marginal propensity to spend out of either mailed-out rebates or reduced withholding, id. at 1
159. even though economic theory suggests that spending out of the mailings should be lower, id. at 20.
160. But they also report that a smaller proportion of households knew that they had received a tax benefit delivered through lower withholding. Id. at 9-10. That suggests that the lower salience of the withholding may have depressed spending among the population receiving it, leaving the two populations' propensities to spend roughly equivalent.
161. William Adams et al., Liquidity Constraints and Imperfect Information in Subprime Lending, 99 AM. ECON. REV. 49, 59 (2009).
162. Id. at 63
163. see also Daniel Aaronson et al., The Spending and Debt Response to Minimum Wage Hikes 23-24 (Fed. Res. Bank of Chi., Working Paper No. 2007-23, 2008), available at http://www.chicagofed.org/digital-assets/publications/ working-papers/2007/wp2007-23.pdf (finding that increases in the minimum wage rate allow households to buy goods requiring down payments).
164. Adams et al., supra note 85, at 59.
165. An average tax refund represents about 6.5 weeks of net income for a low-income family. Cole et al., supra note 79, at 1.
166. For additional evidence on the importance of rebates in overcoming the down-payment problem, see Souleles, supra note 78, at 954 (explaining how constrained consumers save up for durables)
167. David W. Wilcox, Social Security Benefits, Consumption Expenditure, and the Life Cycle Hypothesis, 97 J. POL. ECON. 288, 303 (1989) (finding that actual receipt of higher Social Security benefits increases auto purchases, but announcement of benefits increase does not).
168. Orazio P. Attanasio et al., Credit Constraints in the Market for Consumer Durables: Evidence from Micro Data on Car Loans, 49 INT'L ECON. REV. 401, 402 (2008).
169. See id. at 404.
170. Id. at 406, 427.
171. See id. at 433
172. see also Gross & Souleles, supra note 74, at 168 (offering additional evidence that higher interest rates limit borrowing).
173. See Agarwal et al., supra note 79, at 1005-07 (describing the effects of rebate on lowlimit credit card holders, and arguing they demonstrate "binding liquidity constraints")
174. Donald Cox & Tullio Japelli, The Effect of Borrowing Constraints on Consumer Liabilities, 25 J. MONEY, CREDIT & BANKING 197, 198 (1993) (employing a survey to identify borrowers who were denied credit)
175. Gross & Souleles, supra note 74, at 151-52 (using a data set of credit card use, and finding that borrowing increases together with limit increases)
176. Lyons, supra note 78, at 248-49 (examining patterns of credit-application denials)
177. James X. Sullivan, Borrowing During Unemployment: Unsecured Debt as a Safety Net, 80 J. HUM. RESOURCES 383, 384-85 (2008) (using survey data to link spending patterns with periods of unemployment)
178. Cole et al., supra note 79, at 11-15 (suggesting that high fees paid by taxpayers to accelerate their refunds by a few weeks indicate that borrowers lack "lower-cost credit alternatives").
179. Gross & Souleles, supra note 74, at 164 fig.I
180. Lyons, supra note 78, at 252.
181. E.g., Gross & Souleles, supra note 74, at 159.
182. George-Marios Angeletos et al., The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation, 15 J. ECON. PERSP. 47, 62-64 (2001)
183. Marianne Bertrand & Adair Morse, What Do High-Interest Borrowers Do with Their Tax Rebate? 1 (Chi. Booth Sch. Of Bus., Working Paper No. 29, 2009), available at http://ssrn.com/abstract=134489
184. Jeffrey R. Campbell & Zvi Hercowitz, Liquidity Constraints of the Middle Class 16 (Fed. Res. Bank of Chi., Working Paper No. 2009-20, 2008), available at http://ssrn.com/abstract=1344489.
185. For yet other evidence of liquidity constraints, see David Card et al., Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market, 122 Q.J. ECON. 1511, 1553-55 (2007). The data also suggests that black households and those headed by unmarried women are especially constrained.
186. See Lyons, supra note 78, at 241.
187. For example, in one experiment, the rebate was only available to working households or to households with "qualifying" income of at least $3000. Sahm et al., supra note 79, at 1
188. see also Agarwal et al., supra note 79, at 987 n.1 (noting that about 23 million households did not file an income tax return and so were not covered by their study)
189. Johnson et al., supra note 78, at 4 n.7 (acknowledging that the credit they study flows mostly to families making in excess of $20,000).
190. In order to qualify for Social Security benefits, an individual must meet certain salary and years-worked targets, or must be married to an individual who does. See generally SOC. SEC. ADMIN., PUB. NO. 05-10035, RETIREMENT BENEFITS (2010) (discussing Social Security benefit eligibility requirements).
191. Indeed, car loans and credit cards are usually unavailable to the very poor. Cf. Littwin, supra note 77, at 463 (describing studies on access to credit cards for low-income families).
192. Shapiro & Slemrod, supra note 79, at 385.
193. See Johnson et al., supra note 79, at 1592
194. Sahm et al., supra note 79, at 2.
195. See Johnson et al., supra note 79, at 1603 (discussing spending increases when there are expected increases in income)
196. Sahm et al., supra note 79, at 6-7 (same).
197. See Coronado et al., supra note 79, at 11 (finding that income tax rebates were a genuine surprise to more than a quarter of households, and about a third of households in the case of a payroll tax rebate).
198. See id. at 14-15.
199. Examples include individuals who could file for bankruptcy, or who might quickly spend their rebate proceeds and render themselves effectively judgment-proof.
200. Cf. KEITH ERNST ET AL., CTR. FOR RESPONSIBLE LENDING, QUANTIFYING THE ECONOMIC COST OF PREDATORY PAYDAY LENDING 3 (2004), available at http://www.responsible lending.org/payday-lending/research-analysis/ CRLpaydaylendingstudy121803.pdf (finding that payday borrowers often fail to repay when their paychecks arrive because they must instead pay "basic living expenses, such as electricity, rent, and groceries").
201. Cf. Julia J. Bartkowiak, Trends Toward Part-Time Employment: Ethical Issues, 12 J. BUS. ETHICS 811, 812 (1993) ("A fundamental aspect of the low wage/high turnover model is that employees are expected to leave the company on a regular basis.").
202. Cf. Michael S. Barr, Banking the Poor, 21 YALE J. ON REG. 121, 146 (2004) (noting that transient workers and undocumented immigrants have difficulty opening bank accounts).
203. Ronald J. Mann & Jim Hawkins, Just Until Payday, 54 UCLA L. REV. 855, 864-65 (2007)
204. see Barr, supra note 107, at 155 (explaining that high fees for fringe lenders are associated in part with costs of origination, follow-up, and loan losses).
205. William H. Meckling, Financial Markets, Default, and Bankruptcy: The Role of the State, 41 LAW & CONTEMP. PROBS. 13, 24-27 (1977)
206. Sumit Agarwal et al., Adverse Selection in the Credit Card Market: Evidence from a Natural Experiment 14-15 (unpublished manuscript), available at http://ushakrisna.com/CreditCardAdvSelection.pdf (explaining that low-income individuals "have fewer option for acquiring funds to smooth consumption"). That is, borrowing by low-asset individuals often produces a "market for lemons." Without knowing the riskiness of a borrower, rational lenders will offer rates only the riskiest borrowers would accept. Since these are the only customers the lender attracts, she ends up losing money on many of her loans, leading her to charge higher rates, which in turn leads to riskier borrowers, and so on.
207. Joseph E. Stiglitz & Andrew Weiss, Credit Rationing in Markets with Imperfect Information, 71 AM. ECON. REV. 393, 402-03 (1981)
208. Agarwal et al., supra note 109, at 3.
209. Inframarginal purchasers are those who are willing to pay more than the equilibrium price for a good because they value it more than the customer who values it least (the marginal customer). See IVAN PNG & DALE LEHMAN, MANAGERIAL ECONOMICS 230-31 (3d ed. 2007).
210. That is, although there remain "lemons" in the market, if inframarginal demand is high enough, the high-demand, high-quality borrowers may be profitable enough to overcome losses from low-quality borrowers. See Richard R.W. Brooks, Credit Past Due, 106 COLUM. L. REV. 994, 998 (2006) (stating that lending to "fringe" customers is made possible by cross-subsidies from safe but unknown customers to risky borrowers).
211. See, e.g., Adams et al., supra note 85, at 66-68 (demonstrating that lenders can break even in the presence of asymmetric information by offering contracts that force borrowers to reveal their own riskiness, such as through different tiers of down payments).
212. Mann & Hawkins, supra note 108, at 911.
213. JOHN P. CASKEY, FRINGE BANKING: CHECK-CASHING OUTLETS, PAWNSHOPS, AND THE POOR 107 (1994)
214. Brooks, supra note 112, at 997-98.
215. Susan Block-Lieb & Edward J. Janger, The Myth of the Rational Borrower: Rationality, Behavioralism, and the Misguided "Reform" of Bankruptcy Law, 84 TEX. L. REV. 1481, 1511-12 (2006)
216. see Adams et al., supra note 85, at 82 ("[M]odern credit scoring can go a significant distance toward mitigating adverse selection problems . . . .").
217. See Block-Lieb & Janger, supra note 116, at 1488, 1516-17 (observing that innovations in fringe lending practices allow lenders to charge prices that "would have been viewed as usurious" in an earlier era)
218. Mann & Hawkins, supra note 108, at 889 (explaining that a key development allowing bifurcation of the loan market was a legal change allowing very high rates).
219. See Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. PA. L. REV. 1, 8-9 (2008) (arguing that consumers' "imperfect rationality" reduces price competition among lenders)
220. Block-Lieb & Janger, supra note 116, at 1525-58 (arguing that cognitive failures allow lenders to exploit low-income borrowers)
221. Brooks, supra note 112, at 1010-11 (noting that conventional lenders avoid the fringe market, reducing competition for small lenders).
222. But see Oren Bar-Gill, The Law, Economics and Psychology of Subprime Mortgage Contracts, 94 CORNELL L. REV. 1073, 1083 (2009) (arguing that increased competition might actually increase efforts to mislead borrowers).
223. Cf. Littwin, supra note 77, at 457-58 (explaining the importance of credit in allowing low-income families to cope with and even survive crises, and noting that "[t]iming is especially crucial for low-income families")
224. Bertrand & Morse, supra note 95, at 2, 10 (finding that certain payday borrowers use funds to "avoid . . . having the gas connection turned off or to catch up with late rent payments" and "buy[ ] groceries"). We are also sympathetic to claims that many borrowers are not acting rationally at all, but instead are making serious mistakes that reduce their own subjective well-being.
225. E.g., Block-Lieb & Janger, supra note 116, at 1489-90. Markets may contain a mix of rational and irrational actors.
226. See Bar-Gill, supra note 118, at 1123-24. Indeed, we believe that mistaken borrowing can be a serious problem for tax rebates, as we elaborate. See infra Part III.G. For now our only point is that, even if all borrowers are fully rational, there is still a strong basis for government intervention.
227. See Mann & Hawkins, supra note 108, at 885 (suggesting that some borrowers who pay high fees are acting rationally and use funds to "purchase food or medicine").
228. See RICHARD A. MUSGRAVE & PEGGY B. MUSGRAVE, PUBLIC FINANCE IN THEORY AND PRACTICE 156 (5th ed. 1989).
229. Cf. Christopher L. Peterson, Usury Law, Payday Loans, and Statutory Slight of Hand: Salience Distortion in American Credit Pricing Limits, 92 MINN. L. REV. 1110, 1126-27 (2008) ("[P]ayday lending has proven wildly profitable.").
230. See Block-Lieb & Janger, supra note 116, at 1489-90.
231. See infra Part IV.B.
232. See Bertrand & Morse, supra note 95, at 1.
233. CHI CHI WU & JEAN ANN FOX, NAT'L CONSUMER LAW CTR., INC., CONSUMER FED'N OF AM., COMING DOWN: FEWER REFUND ANTICIPATION LOANS, LOWER PRICES FROM SOME PROVIDERS, BUT QUICKIE TAX REFUND LOANS STILL BURDEN THE WORKING POOR 8-12 (2008)
234. Barr, supra note 107, at 168-69.
235. Barr, supra note 107, at 169.
236. WU & FOX, supra note 126, at 4.
237. Barr, supra note 107, at 149.
238. For an overview of the industry, see generally CASKEY, supra note 115, at 36-67.
239. Barr, supra note 107, at 154-55.
240. Mann & Hawkins, supra note 108, at 892.
241. Bertrand & Morse, supra note 95, at 1.
242. See Fennell & Stark, supra note 13, at 19-20 (explaining that what look like failures to smooth may be the product of deliberate but unusual preferences)
243. Johnson et al., supra note 78, at 14 n.19 (noting that their data can also be interpreted as evidence of households deliberately choosing to accumulate a "buffer stock" against uncertain future outcomes).
244. See supra note 82 and accompanying text.
245. See Cole et al., supra note 79, at 11-13.
246. Bertrand & Morse, supra note 95, at 7-8
247. Broda & Parker, supra note 79, at 3-4.
248. See Angeletos et al., supra note 95, at 49
249. see also Michael S. Barr & Jane K. Dokko, Paying to Save: Tax Withholding Among Low- and Moderate-Income Taxpayers 2-4 (Aug. 2009) (unpublished manuscript) (on file with author) (considering this argument).
250. For a review of the empirical evidence on whether transactional consumption taxes are more difficult for shoppers to detect, see Brian Galle, Hidden Taxes, 87 WASH. U. L. REV. 59, 72-77 (2009).
251. See Christine Jolls et al., A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1476 (1998) (explaining the rational planning model of economic behavior).
252. See B. Douglas Bernheim & Antonio Rangel, Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics 23-24 (Nat'l Bureau of Econ. Res., Working Paper No. 13737, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1086986.
253. See id. at 24.
254. Raj Chetty et al., Salience and Taxation: Theory and Evidence, 99 AM. ECON. REV. 1145, 1146 (2009).
255. Cf. Littwin, supra note 77, at 477-78 (describing how poor women learn techniques for managing tight finances, and noting that these techniques are imperiled by rapid changes in household finance).
256. See Ted O'Donoghue & Matthew Rabin, Self-Awareness and Self-Control, in TIME AND DECISION: ECONOMIC AND PSYCHOLOGICAL PERSPECTIVES ON INTERTEMPORAL CHOICE 217, 218-19 (George Loewenstein et al. eds., 2003)
257. George Loewenstein et al., Projection Bias in Predicting Future Utility, 118 Q.J. ECON. 1209, 1209 (2003).
258. Stephen H. Schneider & Lawrence H. Goulder, Achieving Low-Cost Emissions Targets, 389 NATURE 13, 13 (1997).
259. See Galle, supra note 138, at 85-89.
260. This will be explored in more detail in Part III.F.
261. See Chetty et al., supra note 142, at 1175-76.
262. Galle, supra note 138, at 100-04. That is, while wealthier taxpayers can acquire information about taxes more readily, the impact of a tax on them is smaller than it is on poorer individuals, which reduces their incentive to acquire information. So it is ambiguous which effect prevails.
263. Bar-Gill & Warren, supra note 118, at 64.
264. Galle, supra note 138, at 101.
265. Amy Finkelstein, E-ZTax: Tax Salience and Tax Rates, 124 Q.J. ECON. 969, 981-82 (2009).
266. See supra text accompanying note 21.
267. See Ekins & Barker, supra note 20, at 77.
268. See Todd J. Zywicki, The Economics of Credit Cards, 3 CHAP. L. REV. 79, 138-42 (2000) (making this argument about credit card users).
269. Bar-Gill & Warren, supra note 118, at 11-25
270. Bar-Gill, supra note 118, at 1128-29.
271. Bar-Gill & Warren, supra note 118, at 12-14.
272. See id. at 14-17. Additionally, peer-to-peer learning may be slowed by the self-interest of informed peers.
273. John Y. Campbell, Household Finance, 61 J. FIN. 1553, 1586-88 (2006).
274. See Bar-Gill & Warren, supra note 118, at 16, 24-25 (discussing the importance of use patterns).
275. Id. at 16. Similarly, where individual factors are important, families cannot easily learn just by observing others.
276. See Browning & Lusardi, supra note 37, at 1846.
277. Bar-Gill & Warren, supra note 118, at 18-19.
278. See id. at 26-56.
279. For similar surveys of persistent household ignorance in personal finance decisions, see Alexander L. Brown et al., Learning and Visceral Temptation in Dynamic Saving Experiments, 124 Q.J. ECON. 197, 200 (2009)
280. Campbell, supra note 158, at 1579-85, 1588-89.
281. See Galle, supra note 138, at 89-93.
282. Id. at 90.
283. Joel Slemrod, Old George Orwell Got It Backward: Some Thoughts on Behavioral Tax Economics 5-6 (CESifo, Working Paper No. 2777, 2009), available at http://ssrn.com/abstract=1476210.
284. See supra notes 149-51 and accompanying text.
285. Barr, supra note 107, at 130-32
286. Sondra G. Beverly & Michael Sherraden, Institutional Determinants of Saving: Implications for Low-Income Households and Public Policy, 28 J. SOCIO-ECON. 457, 466-67 (1999).
287. Barr, supra note 107, at 124.
288. See Chetty et al., supra note 142, at 1145-48, 1174 (explaining the household budgeting process under uncertainty about tax rates).
289. See George Loewenstein & Drazen Prelec, Anomalies in Intertemporal Choice: Evidence and an Interpretation, 107 Q.J. ECON. 573, 573-78 (1992) (describing the differences between the prediction of the standard discounting model and observed instances of overconsumption and procrastination).
290. See infra text accompanying notes 172-89.
291. George Loewenstein & Richard H. Thaler, Anomalies: Intertemporal Choice, 3 J. ECON. PERSP. 181, 181 (1989).
292. Loewenstein & Prelec, supra note 170, at 573.
293. Id.
294. Id.
295. See Shane Frederick et al., Time Discounting and Time Preference: A Critical Review, in ADVANCES IN BEHAVIORAL ECONOMICS 162, 166-67 (Colin F. Camerer et al. eds., 2007) (stating that the exponential function is the only one that ensures that actors will exhibit constant levels of impatience).
296. Id. at 170 ("Constant discounting implies that a person's intertemporal preferences are time-consistent, which means that later preferences 'confirm' earlier preferences.").
297. See, e.g., id. at 172-79
298. Loewenstein & Thaler, supra note 172, at 183-87.
299. Importantly, economists embraced exponential discounting because it made their models more tractable mathematically, not because they believed that real-world actors use exponential functions. See GARY S. BECKER, ACCOUNTING FOR TASTES 11 (1996) ("The assumption of consistent preferences is clearly not a literal description of much actual behavior . . . but it is an extremely useful simplification of behavior.")
300. Frederick et al., supra note 176, at 167 (noting that earlier economists adopted the model for its ease of use, not its accuracy). Unlike the large body of evidence supporting the time-inconsistency assumption, there is no systematic evidence finding that people have constant discount rates.
301. See Warren K. Bickel & Matthew W. Johnson, Delay Discounting: A Fundamental Behavioral Process of Drug Dependence, in TIME AND DECISION: ECONOMIC AND PSYCHOLOGICAL PERSPECTIVES ON INTERTEMPORAL CHOICE, supra note 144 (stating that "[e]xponential discounting . . . has not been empirically supported by behavioral research" conducted in humans and animals); see also infra Part III.C (describing evidence that real-world actors have declining discount rates).
302. See, e.g., GEORGE AINSLIE, PICOECONOMICS 63-80 (1992) (describing evidence of declining discount rates and using hyperbolas to model them).
303. See id. at 64 fig.3.2 (illustrating that as the time-delay increases, people require a higher reward value)
304. Christopher Harris & David Laibson, Hyperbolic Discounting and Consumption, in ADVANCES IN ECONOMICS AND ECONOMETRICS 258, 258 (Mathias Dewatripont et al. eds., 2003) (explaining that generalized hyperbolic discount functions decline at a faster rate in the short-run than in the long-run, matching a key feature of experimental data)
305. Loewenstein & Prelec, supra note 170, at 579-81 (setting forth the hyperbolic discount function).
306. See RICHARD H. THALER, Some Empirical Evidence on Dynamic Inconsistency, in QUASI RATIONAL ECONOMICS 127, 128 (Richard H. Thaler ed., 1991).
307. Id.
308. Id. at 129.
309. Id. at 130 tbl.2.
310. Id. at 129.
311. Commitment devices are mechanisms that restrict an actor's ability to
312. See generally Ted O'Donoghue & Matthew Rabin, Choice and Procrastination, 116 Q.J. ECON. 121 (2001) (developing a model of partially nave households).
313. See id. at 150 (suggesting that earlier findings support a model of optimism about future willpower).
314. See supra Part II.A.
315. In technical terms, this change in behavior can be thought of as representing both income and substitution effects. The TI household perceives itself as wealthier because it believes the future costs of indulging are lower, expanding its budget constraint. Under a prebate regime, or for households that are not liquidity-constrained that expect a rebate, there is also an actual increase in wealth in the amount of the reimbursement. Additionally, there is a substitution effect, as the household shifts its consumption towards tempting goods-goods whose costs are delayed and which therefore seem cheaper per unit than other consumption choices. The reimbursement does not contribute to this second effect, but the added wealth represented by the reimbursement enlarges its impact.
316. See supra text accompanying notes 186-87.
317. See Jesse M. Shapiro, Is There a Daily Discount Rate? Evidence from the Food Stamp Nutrition Cycle, 89 J. PUB. ECON. 303, 315-16 (2005)
318. see also Bertrand & Morse, supra note 95, at 7-9 (finding that taxpayers whose other behavior suggests a susceptibility to " temptation" are most likely to spend their tax rebate on indulgences rather than paying bills).
319. See Shapiro, supra note 193, at 321-22.
320. See Carlos Dobkin & Steven Puller, The Effects of Government Transfers on Monthly Cycles in Drug Abuse, Hospitalization and Mortality, 91 J. PUB. ECON. 2137, 2145-49 (2007)
321. Liquidity-constrained households can only overconsume for as long as Melvin Stephens Jr., "3rd of the Month": Do Social Security Recipients Smooth Consumption Between Checks?, 93 AM. ECON. REV. 406, 419 (2003)
322. David Huffman & Matias Barenstein, Riches to Rags Every Month? The Fall in Consumption Expenditures Between Paydays (Inst. For the Study of Lab., Discussion Paper No. 1430, 2004), available at http://ssrn.com/abstract=636622. It should be noted that while all these sources find a pattern that can be explained, at least in part, due to time inconsistency, the authors provide a number of possible explanations.
323. Ian Ayres et al., Evidence from Two Large Field Experiments that Peer Comparison Feedback Can Reduce Residential Energy Usage 11 fig.8 (July 16, 2009) (unpublished manuscript), available at http://ssrn.com/abstract=1434950.
324. For yet more evidence that impatience impairs savings, see Brown et al., supra note 162, at 199.
325. See supra Part II.A.2.
326. See Sumit Agarwal et al., Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?, 99 AM. ECON. REV. 412, 415 (2009) (offering evidence that credit cards may lead to overconsumption out of impatience).
327. The ambient temperature at the time households plan may itself distort planning. People tend to mispredict their future preferences because when they project, they give undue weight to their current state when making such predictions. For example, someone who has just had a large breakfast may order a light lunch because she projects her current sated state in trying to ascertain how hungry she will feel by lunch. See Loewenstein et al., supra note 144, at 1209-10 (discussing projection bias).
328. See infra Part III.E-.F.
329. See Barr, supra note 107, at 134-35 (discussing the transaction costs of borrowing).
330. See O'Donoghue & Rabin, supra note 188, at 148-49 (explaining why partially nave TI households might not invest optimally for their future).
331. See Campbell, supra note 158, at 1563-64
332. Littwin, supra note 77, at 463.
333. E.g., Barr, supra note 107, at 123.
334. Cf. Campbell, supra note 158, at 1563, 1568-69 (noting that the fixed costs of learning about financial markets tend to reduce participation by less-wealthy households).
335. See Bar-Gill, supra note 118, at 1119.
336. See Haiyan Shui & Lawrence M. Ausubel, Time Inconsistency in the Credit Card Market 8-9 (May 3, 2004) (unpublished manuscript), available at http://ssrn.com/abstract=586622.
337. See Mark Flannery & Katherine Samolyk, Payday Lending: Do the Costs Justify the Price? 10 (FDIC Ctr. for Fin. Res., Working Paper No. 2005-09, 2005), available at http://www.fdic.gov/bank/analytical/cfr/2005/wp2005/CFRWP- 2005-09-Flannery-Samolyk.pdf.
338. See Metcalf & Weisbach, supra note 4, at 516-17 (arguing for dedicating some of the revenue from a carbon tax for this purpose).
339. Since businesses need to make the same type of transition investments, they too have an incentive to procrastinate, but this more general problem is beyond the scope of this Article.
340. See supra Part III.B.2.
341. See Stefano DellaVigna & M. Daniele Paserman, Job Search and Impatience, 23 J. LAB. ECON. 527, 569 (2005) (finding that impatient unemployed workers expended less effort to find a new job)
342. Teela Sanders, Becoming an Ex-Sex Worker: Making Transitions Out of a Deviant Career, 2 FEMINIST CRIMINOLOGY 74, 75 (2007) (describing studies finding that women delay leaving the sex trade because of the immediate economic costs of exiting, such as the loss of funds to finance drug use and the lack of available alternative work)
343. Hanming Fang & Dan Silverman, Time-Inconsistency and Welfare Program Participation: Evidence from the NLSY, 50 INT'L ECON. REV. 1043, 1065-70 (2009) (finding that impatient women exerted less effort to transition from welfare to work)
344. Francesco Drago, Career Consequences of Hyperbolic Time Preferences 3 (Inst. for the Study of Lab., Discussion Paper No. 2113, 2005), available at http://ssrn.com/abstract=706281 (finding that impatient employees expended less effort to get promoted).
345. See supra Part III.B.1 (discussing overconsumption and delayed benefits).
346. Cf. Super, supra note 5, at 1149 (noting that the costs of energy efficiency may be a bar for low-income families, even with some government assistance).
347. See GRUBER, supra note 26, at 29-34 (discussing marginal utility and budget constraints).
348. Cf. Shammin & Bullard, supra note 2, at 2436 (finding that poorer households make use of more carbon-intensive products).
349. See Richard Counihan and David Nemtzow, Energy Conservation and the Rental Hous ing Market, 2 SOLAR L. REP. 1103, 1105 (1981) (explaining that "rentals tend to be older and more energy-inefficient than owner-occupied properties").
350. Id.
351. See id.
352. See Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 YALE L.J. 239, 269-71 (1984) (analyzing the incentives of transacting parties to acquire and reveal information).
353. See Stephan Meier & Charles Sprenger, Discounting Financial Literacy: Time Preferences and Participation in Financial Education Programs 2-3 (Inst. for the Study of Lab., Discussion Paper No. 3507, 2008), available at http://ssrn.com/abstract=1139877 (explaining that households must decide how much effort to invest in acquiring information about financial matters).
354. While sometimes it is beneficial to acquire information immediately, at other times it is valuable to wait, given that uncertainty regarding the value of that information may be reduced over time. As Kenneth Arrow argues, investments in information often represent irreversible investments that depreciate over time in the same fashion as capital investments in tangible assets. KENNETH J. ARROW, THE LIMITS OF ORGANIZATIONS 39-41 (1974). An implication of the irreversibility of investments in information is that waiting to acquire information until some of the uncertainty regarding the information has been resolved may be valuable in the same fashion that waiting to make irreversible investments in hard assets may provide the decisionmaker with an option value.
355. On the creation of option values in waiting to make irreversible investments, see AVINASH K. DIXIT & ROBERT S. PINDYCK, INVESTMENT UNDER UNCERTAINTY 6-9 (1994).
356. See Meier & Sprenger, supra note 221, at 3-4 (reporting evidence that households procrastinate acquiring costly information).
357. In addition to the external informational asymmetries discussed in the law and economics literature on contracting (for example, asymmetrical knowledge about the other party's characteristics), transacting parties also face what one can call internal informational asymmetries- an individual's informational deficits about herself. These can include imperfect information about her talents; her past actions, and their motivations; and her propensity to succumb to selfcontrol problems. See Roland Bénabou & Jean Tirole, Self-Knowledge and Self-Regulation: An Economic Approach, in 1 THE PSYCHOLOGY OF ECONOMIC DECISIONS 137, 137-38 (Isabelle Brocas & Juan D. Carrillo eds., 2003) (discussing economic actors with "imperfect self-knowledge, imperfect willpower and imperfect recall").
358. A positive self-image is something that individuals value, and self-confidence and optimism play an important role in preserving and bolstering those self-images. See Roy F. Baumeister, The Self, in 1 THE HANDBOOK OF SOCIAL PSYCHOLOGY 680, 688-92 (Daniel T. Gilbert et al. eds., 4th ed. 1998) (providing an overview regarding the body of literature on how individuals construct and maintain their sense of self, and how they protect it against negative information that may challenge their self-esteem). In fact, one way of understanding an individual's self-image is as an additional argument to that individual's utility function.
359. See Bénabou & Tirole, supra note 224, at 142.
360. Economic actors may engage in such "strategic ignorance" aimed at preserving their current levels of self-confidence. Bénabou & Tirole, supra note 224, at 144. As Baumeister states: "Given the powerful motivation to think well of oneself, it is necessary to ask how people manage to maintain such self-flattering views in the face of mixed and even contrary evidence."
361. Baumeister, supra note 225, at 690.
362. See, e.g., O'Donoghue & Rabin, supra note 188, at 123-24 (modeling individuals who periodically calculate expected future costs of procrastination in each successive period).
363. Cf. Patrick Bolton & Antoine Faure-Grimaud, Thinking Ahead: The Decision Problem 1-3 (Nat'l Bureau of Econ. Res., Working Paper No. W11867, 2005), available at http://ssrn.com/abstract=872723 (claiming that deciding how to act in the future is experienced as a present cost).
364. George Ainslie, A Research-Based Theory of Addictive Motivation, 19 LAW & PHIL. 77, 79-91 (2000).
365. See infra notes 236-39 and accompanying text.
366. See Ted O'Donoghue & Matthew Rabin, Doing It Now or Later, 89 AM. ECON. REV. 103, 105 (1999) (noting that economists use commitment devices as evidence-"smoking guns"-of time-inconsistent preferences).
367. One cost of commitment is that people generally value their autonomy and find disutility in having their wills constrained unnecessarily. See CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 13-14 (1981) (discussing the cost of commitment and autonomy in the realm of interpersonal contracts).
368. Once we introduce the potential of uncertainty regarding future payoffs, an intertemporal decisionmaker may find it valuable to have an option to reverse her original decision. On the creation of option values by waiting to make irreversible investments until a decisionmaker has acquired greater information, see DIXIT & PINDYCK, supra note 222, at 6-9.
369. See also Daniel T. Gilbert & Jane E. J. Ebert, Decisions and Revisions: The Affective Forecasting of Changeable Outcomes, 82 J. PERSONALITY & SOC. PSYCHOL. 503, 510-11 (2002) (finding that, although the individuals who were given the choice to change their minds about which photography prints to keep liked their choices less than those individuals who had no ability to change, individuals still preferred having the option to change).
370. See Dan Ariely & Klaus Wertenbroch, Procrastination, Deadlines, and Performance: Self-Control by Precommitment, 13 PSYCHOL. SCI. 219, 223 ("A rational decision maker with time-consistent preferences would not impose constraints on his or her choices.").
371. See, e.g., T. C. Schelling, Egonomics, or the Art of Self-Management, 68 AM. ECON. REV. 290, 290 (1978) (discussing externally imposed self-control devices, such as creating an inaccessible savings account and understating dependents for tax purposes to reduce tax liability in April)
372. see also Ariely & Wertenbroch, supra note 234, at 220-23 (analyzing the role of selfimposed deadlines in addressing the temptation to procrastinate)
373. Klaus Wertenbroch, Consumption Self-Control by Rationing Purchase Quantities of Virtue and Vice, 17 MARKETING SCI. 317, 318 (1998) (describing the strategic self-imposition of constraints in the context of purchasing cigarettes). Drug and alcohol rehabilitation programs require minimum stays and full payment up-front for the required treatment period, a part of which it keeps if the patient checks out early. For example, the Cirque Lodge, a well-known facility of this type, has a thirty-day minimum stay and requires patients to pay for that thirty-day period at the time that they check in.
374. Admission Guidelines, CIRQUE LODGE, http://www.cirquelodge.com/Admission/ AdmissionGuidelines.php (last visited Sept. 26, 2010) ("A deposit for 30 days is due upon admission.").
375. Littwin, supra note 77, at 470.
376. For an overview, see Richard A. Kaplan, Retirement Funding and the Curious Evolution of Individual Retirement Accounts, 7 ELDER L.J. 283, 292-303 (1999).
377. See Nava Ashraf et al., Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines, 121 Q.J. ECON. 635, 636-37 (2006).
378. See Barr, supra note 107, at 130-32
379. Beverly & Sherraden, supra note 167, at 466-67.
380. See David Laibson, Life-Cycle Consumption and Hyperbolic Discount Functions, 42 EUR. ECON. REV. 861, 868 (1998) (discussing commitment devices to deal with procrastination in saving for retirement, including channeling funds to illiquid assets such as defined benefit pensions, 401(k)s, Social Security contributions, and home equity).
381. See Adams et al., supra note 85, at 57.
382. See supra text accompanying notes 85-87.
383. See Barr & Dokko, supra note 137, at 2-3 (considering the argument that tax rebates are a commitment device, and reporting that many taxpayers claim that they intentionally overwithhold for this reason)
384. see also Richard H. Thaler, Anomalies: Saving, Fungibility, and Mental Accounts, 4 J. ECON. PERSP. 193, 193-95 (1990) (suggesting this behavior as an aspect of mental accounting).
385. Barr & Dokko, supra note 137, at 5-6, 14.
386. See Barr, supra note 107, at 123 (describing the failure of low-income families to save for long-term goals).
387. See Angeletos et al., supra note 95, at 48-49 (analogizing to actors who place an alarm clock out of reach to force themselves not to press snooze).
388. See id. at 59 (finding that hyperbolic households hold less liquid wealth and, accordingly, "smooth consumption less successfully over the life cycle")
389. cf. Barr & Dokko, supra note 137, at 20 (finding that intentional overwithholding is inefficient unless the household places an extremely high value on present consumption over deferred consumption)
390. id. at 22 (noting that the commitment to defer refunds can cause households to use high-cost debt for unexpected short-term needs).
391. See supra notes 203-08 and accompanying text.
392. See Metcalf & Weisbach, supra note 4, at 513-14.
393. See Kirk J. Stark, The Uneasy Case for Extending the Sales Tax to Services, 30 FLA. ST. U. L. REV. 435, 446-48 (2003) (explaining the distortive effect of sales taxes on some goods but not others).
394. To choose but one of many such cases, see, for example, O'Boyle's Ice Cream Island, Inc. v. Pennsylvania, 553 A.2d 1033, 1034-35 (Pa. Commw. Ct. 1989) (answer: candy).
395. Charles Forelle, A Peep at EU Tax Law. Read On. Really., REAL TIME BRUSSELS, (Mar. 12, 2010, 11:14 AM), http://blogs.wsj.com/brussels/2010/03/12/a- peep-at-eu-tax-law-readon- really/.
396. Metcalf & Weisbach, supra note 4, at 514-15.
397. See Turnier, supra note 52, at 438-39.
398. Fennell, supra note 37, at 56.
399. See id. at 55-56 (noting that this problem arises for any sharp income threshold).
400. That is, low-income buyers can resell their purchases to high-income purchasers and divide the tax savings.
401. See supra text accompanying notes 54-56; see also Thomas Merrill & David M. Schizer, Energy Policy for an Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan, 27 YALE J. ON REG. 1, 13 & n.25 (2010) (recommending quarterly rebates of the authors' proposed gasoline tax in order to mitigate any potential income-smoothing problems).
402. See supra text accompanying notes 103-32.
403. See Part III.C.
404. In his book, Graetz does note that rebates could also be made available via "smart" cards, which could help in reaching the unemployed. MICHAEL J. GRAETZ, 100 MILLION UNNECESSARY RETURNS: A SIMPLE, FAIR, AND COMPETITIVE TAX PLAN FOR THE UNITED STATES 178-79 (2008).
405. Littwin, supra note 77, at 485-88.
406. See David I. Laibson, Hyperbolic Discount Functions, Undersaving, and Savings Policy 21 (Nat'l Bureau of Econ. Res., Working Paper No. 5635, 1996), available at www.nber.org/papers/w5635.
407. We emphasize that we have chosen this figure for illustrative purposes only. Given the difficulty of balancing between liquidity and temptation, the amount of money that should be available in a given time period is a key design question for any SDD program. We cannot offer a precise number in the abstract because the best balance will depend on the empirics of how households respond to their reimbursements.
408. Laibson, supra note 263, at 3.
409. See supra note 81 and accompanying text.
410. This plan can be similar to the automatic mechanism employed in Thaler and Sunstein's "save more tomorrow" plan, which invites employees to commit to a program that automatically inserts excess money into a savings account. See THALER & SUNSTEIN, supra note 24, at 104-19.
411. On the advantages of expanding banking access, see Barr, supra note 107, at 126-28.
412. See Fennell & Stark, supra note 13, at 47 (noting that a tax system that facilitated income smoothing could increase welfare cost-effectively).
413. See Sullivan, supra note 92, at 384.
414. GRAETZ, supra note 261, at 178-79
415. GREENSTEIN ET AL., supra note 11, at 13-14.
416. American Clean Energy and Security Act of 2009, H.R. 2454, 111th Cong. § 431 (2009).
417. I.R.C. § 32 (2006).
418. See WU & FOX, supra note 126, at 12.
419. But see id. at 32-34 (discussing state attempts to limit RALs and the legal challenges to these attempts).
420. Alternatively, society could reduce the total transfer to rebate recipients to leave them at the same level as they formerly received, net of RAL fees. This might be superior in welfare terms to shifting all the money to recipients in the event that society has some third use for the money that generates more welfare than either other option. This could include a more efficient means of improving the well-being of the rebate recipients.
421. See supra Part III.C.
422. Of course, cardholders can always use noncard funds for their carbon-intensive purchases. But these other funds might be limited, and the inconvenience of planning how to make each purchase could itself discourage this kind of arbitrage.
423. Cf. Merrill & Schizer, supra note 258, at 12, 37 (recommending that the authors' proposed gasoline tax be refundable to consumers, albeit in an amount equal to average per capita, rather than actual, cost).
424. See infra Part V.A.
425. See infra Part V.B.
426. Bull et al., supra note 20, at 145
427. Jorgenson et al., supra note 34, at 395
428. Kevin A. Hassett et al., The Consumer Burden of a Carbon Tax on Gasoline 3 (Am. Enter. Inst., Working Paper No. 147, 2009), available at http://www.aei.org/docLib/Consumer%20Burden%20AEI%20 WP%20147.pdf
429. see also Don Fullerton & Diane Lim Rogers, Lifetime Versus Annual Perspectives on Tax Incidence, 44 NAT'L TAX J. 277, 277-78 (1991) (making this argument about taxes generally).
430. See Bull et al., supra note 20, at 146, 161
431. Jacobsen et al., supra note 42, at 486
432. Burtraw et al., supra note 65, at 22
433. Hassett et al., supra note 282, at 9.
434. See Hassett et al., supra note 282, at 3-4.
435. See Dinan & Lim Rogers, supra note 5, at 217 (suggesting that since capital markets are not perfect, annual incidence is also important)
436. Shaviro, supra note 40, at 771 (explaining that where some taxpayers cannot borrow fully, lifetime income mismeasures welfare since a dollar may have different utility to the taxpayer at different times). Some lifetime equity proponents acknowledge this point.
437. Bull et al., supra note 20, at 149.
438. See Bull et al., supra note 20, at 148
439. Jacobsen et al., supra note 42, at 478
440. Hassett et al., supra note 282, at 2-4
441. see also Fullerton & Lim Rogers, supra note 282, at 278 (observing that workers with "average permanent income" but volatile incomes may be misidentified as poor).
442. See Metcalf, supra note 4, at 14 (describing a distribution-neutral tax scheme).
443. See Harsanyi, supra note 48, at 254.
444. See Hassett et al., supra note 282, at 2-3
445. see also Bull et al., supra note 20, at 148 ("[E]lderly people drawing down their savings in retirement will look poor when in fact they may be comfortably well off in a lifetime context.").
446. Of course, it is also possible that the Busdriver family will not borrow to make up for lost present consumption-for example, because they anticipate their future liquidity crunch and thus refrain from incurring more debt. But in that case, we can easily measure the difference between the two families based on their borrowing behavior. The more difficult case, which we take the lifetime-equity proponents to be focused on, is the one in which present observers cannot distinguish the well-being of the two families.
447. ADLER & POSNER, supra note 28, at 23.
448. See id. at 25.
449. See Inge Mayeres & Stef Proost, Marginal Tax Reform, Externalities and Income Distribution, 79 J. PUB. ECON. 343, 355-56 (2001) (arguing that the social welfare function should include a measure of society's aversion to inequality).
450. That is, the lifetime-equity position seems to be that, in deciding whether a consumption tax is unfair, we must measure not by what happens this year, but instead what happens over the entire lifetime of those affected.
451. Solum, supra note 30, at 196-97.
452. For extended discussion, see generally Nancy J. Altman, Social Security and Intergenerational Justice, 77 GEO. WASH. L. REV. 1383 (2009)
453. Neil H. Buchanan, What Do We Owe Future Generations?, 77 GEO. WASH. L. REV. 1237 (2009)
454. Daniel Shaviro, The Long-Term U.S. Fiscal Gap: Is the Main Problem Generational Inequity?, 77 GEO. WASH. L. REV. 1298 (2009).
455. See Solum, supra note 30, at 199 (noting that presentists would count welfare of future lives only to the extent that the current generation has preferences for the treatment of the future)
456. cf. David A. Dana, Valuing Foreign Lives and Civilizations in Cost-Benefit Analysis: TheCase of the United States and Climate Change Policy 8-14 (Nw. U. Sch. of Law & Econ., Research Paper No. 09-47, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=15 24337 (arguing that U.S. citizens' preference for improving the well-being of other nations should count in the cost-benefit analysis of U.S. climate policy).
457. While the moral question is, again, one that we wish largely to bracket, we should say a word or two to suggest the plausibility of the presentist view. See Solum, supra note 30, at 199 (calling "preference-satisfaction utilitarianism, 'presentism'"). One possibility is that moral obligations to provide for the welfare of others are cabined by our ability to know others' wellbeings. We cannot be held responsible for what we cannot reasonably know. Lifetime utility may be so unknowable that it cannot serve as the basis for our responsibilities.
458. See Dinan & Lim Rogers, supra note 5, at 218 ("It is not possible to actually observe lifetime income for individual households . . . ."). Another possibility would be that our obligations flow to others with whom we are engaged in an ongoing project of mutual governance. We share that project only partially with those who will follow us; perhaps they will honor our decisions, but perhaps not. If not, it may be reasonable for us to assume that the long-term results of our decisions are largely out of our hands in the same way that the welfare of citizens of other nations is only tenuously connected to our own acts.
459. But cf. JOHN RAWLS, JUSTICE AS FAIRNESS: A RESTATEMENT 160 (Erin Kelly ed., 2001) (arguing that members of a community owe an obligation to leave as many resources to the next generation as its members would have wanted the previous generation to leave to them).
460. Bull et al., supra note 20, at 148.
461. Hassett et al., supra note 282, at 3-4.
462. Note that the amount of the erroneous transfer to the Student family is not a loss to society because the Students' welfare also counts towards the social welfare function.
463. "Deadweight loss" refers to the welfare cost to society of raising taxes. For example, if I prefer watching hockey to watching curling, but hockey is taxed, I may attend a curling match instead of a hockey game. That decision lowers my welfare without raising any additional revenue for the government. This loss of welfare is the deadweight loss of the tax. MUSGRAVE & MUSGRAVE, supra note 121, at 280.
464. Measuring the deadweight loss of carbon taxes is a complex undertaking because of the way in which carbon taxes can interact with existing taxes and policies. Ekins & Barker, supra note 20, at 81-89.
465. However, there is no particular reason society must use higher carbon taxes to pay for extra rebates. In theory, a policysetter should choose the revenue instrument with the least deadweight loss. Estimates of U.S. taxes have found deadweight losses of some forms of tax as low as seventeen percent. Charles L. Ballard et al., General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States, 75 AM. ECON. REV. 128, 128 (1985).
466. Even if carbon tax revenues will pay for the increased costs, that choice might actually increase welfare. It seems likely that any carbon price will initially be set below optimal because of political opposition from industries that will bear some of the burden of the tax. Cf. James Murray, Climate Bill Democrats Unveil Free Pollution Permit Proposals, BUSINESSGREEN.COM, Oct. 26, 2009, http://www.businessgreen.com/business-green/news/2251963/climate-bill- democrats- unveil (reporting the likelihood of free distribution of carbon dioxide permits in proposed legislation). In that case, increases in the carbon tax rate will actually improve overall efficiency.
467. For example, suppose a rebate of $1200, the average current estimate. See supra note 11.
468. At seventeen percent, see Ballard et al., supra note 301, at 128, that implies a deadweight loss per error of $204. We assume here that recipients of false-positive rebates are, on average, no richer or poorer than the general population, so that the erroneous redistribution has no other welfare effects.
469. Put another way, the cost of the false negative is the utility of the rebate in the poor family's hands minus the average utility of that same amount in the hands of other taxpayers.
470. Recall that many households are willing to pay fees on the order of $30 to $135 to accelerate a paycheck by no more than two weeks for an annual percentage rate between 150% and 300%. See supra text accompanying notes 125-32.
471. At the lower bound, that is roughly twenty to thirty times what middle-income borrowers would pay. Although some of these excesspayments may be due to mistakes, for rational borrowers, this price differential implies a substantial difference in the perceived utility of additional funds. But cf. Alvin Warren, Would a Consumption Tax Be Fairer than an Income Tax?, 89 YALE L.J. 1081, 1100 (1980) (doubting that preferences for present over deferred income can be used to measure the utility of use of that income).
472. We acknowledge, however, that by assumption society will not be able to determine that a rebate has been erroneously denied. We meant to take no position here on whether planners should consider the welfare effects of policies whose outcomes cannot be known by those who prefer them.
473. See Bull et al., supra note 20, at 148.
474. For example, the so-called "additive lifetime utility function" presumes that we should compare individuals simply by adding up all the good and bad that happens to them throughout their life. See Matthew D. Adler, Future Generations: A Prioritarian View, 77 GEO. WASH. L. REV. 1478, 1491 (2009)
475. noting that the additive utility function is the "standard assumption"); Jorgenson et al., supra note 34, at 400 (measuring the equity of carbon tax assuming an "additive intertemporal utility function"). Thus, the claim that a carbon tax is not regressive over the lifetime, utilizing an additive utility function, assumes that good events happening later in life can counterbalance bad events earlier, and vice versa.
476. Seinfeld: The Opposite (NBC television broadcast May 19, 1994).
477. See Fullerton & Lim Rogers, supra note 282, at 278 (asserting that one measure of distributive fairness of a tax is its total lifetime burden). We assume this view does not contemplate the Calvins of the world, who justifiably ask, "Why isn't [life] ever unfair in my favor?"
478. BILL WATTERSON, THE ESSENTIAL CALVIN AND HOBBES 82 (1988). We concede that this may be a straw-man version of the argument, but we are unaware of any more sophisticated articulation in the welfarist literature.
479. Malcolm Gillis et al., Indirect Consumption Taxes: Common Issues and Differences Among the Alternative Approaches, 51 TAX L. REV. 725, 747 (1996).
480. See Bull et al., supra note 20, at 161 ("[B]ecause energy taxes have different incidence effects across the life cycle, it is important to measure the burden of taxes in terms of lifetime incidence . . . .")
481. Fullerton & Lim Rogers, supra note 282, at 278 (stating that patterns of income and spending across age groups should be factored into an analysis of the fairness of the incidence of a tax).
482. See Lawrence Zelenak, Tax Policy and Personal Identity over Time, 62 TAX L. REV. 333, 338, 357-62 (2009).
483. But see Adler, supra note 307, at 1486 ("[B]ecause personhood endures over a human lifetime, the 'currency' for individuals' claims should be lifetime rather than sublifetime well-being.").
484. Fennell, supra note 37, at 12-13
485. see also Adler, supra note 307, at 1492-93 (acknowledging that the possibility of preferences for the ordering of benefits and burdens over a lifetime is an "empirical question")
486. Neil H. Buchanan, The Case Against Income Averaging, 25 VA. TAX REV. 1151, 1178-81 (2006) (doubting that multiyear comparisons between most taxpayers are meaningful).
487. See Browning & Lusardi, supra note 37, at 1811
488. see also Fennell & Stark, supra note 13, at 51-52 (summarizing other studies).
489. See Brian Galle, Federal Fairness to State Taxpayers: Irrationality, Unfunded Mandates, and the "SALT" Deduction, 106 MICH. L. REV. 805, 849-50 (2008)
490. arguing that in order for thebenefits and burdens of government to even out over time, government must compensate citizens who must wait for the benefits). Further, both planning for and adjusting to misfortunes may carry additional costs, see Shaviro, supra note 40, at 772-73, which would also have to be accounted for to balance the welfare ledger.
491. See Joseph E. Stiglitz, Utilitarianism and Horizontal Equity: The Case for Random Taxation, 18 J. PUB. ECON. 1, 23 (1982) (observing that the opportunity for savings implies that lifetime smoothing of year-to-year inequalities may still be inequitable). At a presentation of this paper, Matt Adler observed that all of these same objections can be raised against annual equity, or indeed any measurement of utility over time. We agree, but each of the criticisms becomes more acute as the span of time that is to be added together increases. For example, it is more likely that the durability of ourselves as discrete moral agents is sturdier across minutes than decades. Further, as a descriptive matter we think it more plausible that society would be capable of forming preferences about utilities over shorter, more measurable periods.
492. Cf. ADLER & POSNER, supra note 28, at 20-21 (stating that the Kaldor-Hicks claim that utilities can even out over time fails to account for transition costs).
493. But see Adler, supra note 307, at 1493-97 (arguing that the social welfare function should not include an additional discount factor for events happening in the future, but instead can incorporate some of the consequences of the passage of time in other ways).
494. See Claire A. Hill, Anti-Anti-Anti Paternalism, 2 N.Y.U. J.L. & LIBERTY 444, 445 (2007) (arguing that consumer choice is the best available evidence of what consumers want.
495. Robert Sugden, On Nudging, 16 INT'L J. ECON. BUS. 365, 367 (2009).
496. (reviewing THALER & SUNSTEIN, supra note 24) (claiming that "nudging" allows policymakers to substitute their own preferences for those of the public).
497. But cf. On Amir & Orly Lobel, Stumble, Predict, Nudge: How Behavioral Economics Informs Law and Policy, 108 COLUM. L. REV. 2098, 2120-23 (2008) (acknowledging the claim that nudges impose the normative judgment of public officials, but arguing that this is both inevitable and desirable).
498. See Jonathan Klick & Gregory Mitchell, Government Regulation of Irrationality: Moral and Cognitive Hazards, 90 MINN. L. REV. 1620, 1626, 1633-41 (2006).
499. Additionally, Professor Glaeser argues that, in the abstract, governments will be less apt at identifying cognitive errors. Edward L. Glaeser, Paternalism and Psychology, 73 U. CHI. L. REV. 133, 142-49 (2006). But this argument is less trenchant as a reason to oppose responses to an already-identified error, although it does suggest that any third party should be appropriately modest in its beliefs that its solution is the right one.
500. See Galle, supra note 315, at 819-23.
501. Manuel A. Utset, Procrastination and the Law, in THE THIEF OF TIME: PHILOSOPHICAL ESSAYS ON PROCRASTINATION 253, 262-63, 266-67 (Chrisoula Andreou & Mark White eds., 2010).
502. THALER & SUNSTEIN, supra note 24, at 240-41.
503. Id. at 1-3.
504. Id. at 3.
505. See supra Part III.D.
506. Of course, this assumes we are confident that there are no liquidity constraints.
507. See supra Part III.C.
508. See THALER & SUNSTEIN, supra note 24, at 240 (distinguishing their suggestions from other forms of paternalism because they still "retain freedom of choice").
509. See J.J. Strain & Kevin D. Cashman, Minerals and Trace Elements, in INTRODUCTION TO HUMAN NUTRITION 177, 192-93 (Michael J. Gibney ed., 2002) (noting the need for potassium and its presence in bananas).
510. We acknowledge that this position does not fully answer the objection that government lacks adequate information to set the correct default position. See, e.g., Glaeser, supra note 319, at 151 (claiming that libertarian paternalism is unattractive to those who think that the problem with paternalism is government errors). The opportunity for individual choice, however, will tend to limit the size of any government error because if the default is wrong by a sufficiently large amount, then we should expect a larger portion of the population to reject it.
511. Fennell, supra note 37, at 42.
512. See id. at 45-46.
513. See supra Part IV.B.
514. This feature allows policymakers to design defaults that are specifically targeted at people who are present-biased; individuals who do not heavily discount future costs and benefits simply override the default and choose their own rule.
515. Klick & Mitchell, supra note 319, at 1626
516. see also Fennell, supra note 37, at 28 (noting this possibility).
517. Klick & Mitchell, supra note 319, at 1626.
518. Id. at 1645-46.
519. On the tradeoffs between insurance and moral hazard, see generally Martin Neil Baily, Some Aspects of Optimal Unemployment Insurance, 10 J. PUB. ECON. 379 (1978).
520. See GEORGE AINSLIE, BREAKDOWN OF WILL 143-60 (2001)
521. discussing commitment devices and their failures); Angeletos et al., supra note 95, at 59.
522. explaining that the use of illiquid investments as a commitment device lowers overall welfare); Barr & Dokko, supra note 137, at 20-21 (finding that taxpayers are inefficiently overwithholding to generate tax rebates).
523. Barr & Dokko, supra note 137, at 16.
524. For example, Graetz notes that workers have the option to accelerate receipt of their EITC payment and expresses puzzlement that few have taken advantage of that opportunity. GRAETZ, supra note 261, at 171-72. Our theory here suggests that this failure to use existing but cumbersome mechanisms for accelerating payments is a compelling example of how procrastination can impede income smoothing. Underutilization of the acceleration option may also reflect some households' efforts to force themselves to save. The design alternatives we have suggested address both these problems.