Category: Law Rev (Virginia)


Agencies in the Cathedral?

AgenciesAreas of law dominated by government agencies haven’t taken advantage of the rich literature on property rules and liability rules, which are “workhorse concepts that permeate every corner of the economic analysis of law.” In their 1972 article Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, Calabresi and Melamed observed that there are fundamentally two types of remedies: (1) property rules, such as injunctions or disgorgement, which aim to deter, and (2) liability rules, like compensatory damages, which aim to compensate. This framework has paid rich dividends in areas like torts, property, IP, contracts, and conlaw — but seems to have bypassed areas of law dominated by agencies.

Government agencies’ remedies can be classified as either property rules or liability rules. For example, if a business has a permit from the EPA but violates the permit’s conditions, the remedy could be either taking away the permit (a property rule), or requiring proportional compensation (a liability rule). Similarly, if a broker has a license from the SEC and violates securities law, the remedy could be either yanking the license (a property rule), or requiring compensation for the harmed parties (a liability rule).

I apply the property rule and liability rule framework to my favorite agency — the IRS — in a forthcoming Virginia Law Review article. When a taxpayer violates a tax-law requirement, the remedy can be either yanking the taxpayer’s favorable tax status (a property rule), or requiring compensatory additional tax (a liability rule). Counterintuitively, anecdotal evidence shows that property-rule remedies may be less effective at deterring violations, because the threat of political and media blowback may make the IRS unwilling to impose a draconian property-rule remedy. As a result, when Congress protects a requirement with the property-rule remedy of yanking a favorable tax status, politically-powerful or sympathetic taxpayers are rarely deterred from violating the requirement. The IRS doesn’t dare impose it. Surely similar problems plague enforcement by other agencies.

Anyone working in any agency-dominated area of law could consider how the property-rule/liability-rule framework fits into their area.


Gently Nudging with Liability Rules?

No Smoking symbolWhy have sexual harassment and anti-smoking laws been so successful in changing entrenched social norms in the U.S. over the past few decades? In a 2000 U. Chicago Law Review article, Dan Kahan observed that combatting these ills took the approach of “gentle nudges,” imposing moderate remedies that were within the range of what decisionmakers (e.g. judges and juries) thought was reasonably proportional to the violation. Because these moderate remedies were enforced, norms shifted, and lawmakers could ratchet up the remedies. By contrast, Kahan observed that “hard shoves” imposing remedies substantially exceeding social norms fail to be enforced or to change norms. For example, France tackled sexual harassment by making it a criminal offense, which French society saw as vastly disproportionate. As a result, French sexual-harassment law went unenforced against conduct that would have easily incurred liability under U.S. law, and French norms barely shifted.

There is an underexplored connection between Kahan’s “gentle nudge” vs. “hard shove” dichotomy, and Calabresi & Melamed’s “property rule” vs. “liability rule” dichotomy. Calabresi & Melamed observed that remedies are either (1) liability rules, such as compensatory damages, or (2) property rules, such as injunctions or prison, which aim to deter. Liability rules generally overlap with “gentle nudges” in that they aim for proportional compensation. Property rules largely overlap with “hard shoves.”

The debate over the relative merits of property rules and liability rules has raged in academia and the courts. Bringing Kahan’s observations into the mix weighs in favor of liability rules, which are more likely to be enforced – and to shift norms.

I explore the relationship between these two dichotomies in sections II.C.3 and IV.C of a forthcoming article looking at IRS enforcement (or lack thereof). But their interrelationship is promising for anyone interested in either the property-rule/liability-rule debate or in altering social norms.


The IRS Scandal, Property Rules, and Liability Rules

IRS LogoRegardless of your take on the IRS targeting conservative groups applying for 501(c)(4) status, the episode demonstrates once again that Congress, the Administration, and the media have multiple avenues to pressure the IRS to act or to reconsider earlier actions. This susceptibility to political pressure has broad, counterintuitive implications for how to best deter violations of requirements throughout tax law.

In their path-breaking law & economics article, Calabresi & Melamed observed that every entitlement can be protected by either a property rule (e.g. injunctions, disgorgement of profits) or a liability rule (e.g. compensatory damages). The same is true in tax law. When a taxpayer violates a requirement for a favorable tax status, the tax code either imposes additional tax proportionate to the harm (a liability rule) or imposes the draconian penalty of taking away the tax status entirely (a property rule).

Which rule is most likely to deter a well-connected organization from violating a requirement imposed on it by tax law? At first glance, property rules (i.e. yanking the organization’s favorable tax status) appear to be the most effective deterrent. But the IRS routinely hesitates to take this draconian step, which would result in complaints to Congress, the Administration, the media, and other organizations. Even if the tax code, as written, imposes this property-rule remedy, the IRS can and often does decline to impose it in practice.

Examples of this problem abound throughout tax law. My favorite example is a real estate investment trust (or “REIT”) that had its IPO in 2007 and revealed in its SEC filing that it was in clear violation of one of the requirements (I.R.C. § 856(a)(2)) to qualify as a REIT for tax purposes. How brazen! But what was the IRS to do? The requirement is protected by a property rule: the only remedy available to the IRS was to take away the REIT’s favorable tax status entirely. This would have been draconian. All the REIT’s shareholders would have complained to their congresspersons, the financial press would have run stories, and the National Association of Real Estate Investment Trusts would have raised a ruckus. The IRS didn’t dare impose this property-rule remedy. The IRS did nothing, and the REIT suffered no consequences for the violation.

Would this REIT have been so brazen if the requirement had, instead, been protected by a liability rule, which would merely have imposed additional tax proportional to the violation? Almost certainly not. And that is the counterintuitive result: liability rules are often more effective in practice than draconian property rules in deterring taxpayers from violating tax-law requirements.

The relative merits of property rules and liability rules in tax law are explored in depth by this forthcoming Virginia Law Review article.



Vanderbilt Law Review, Volume 65, Number 2 (March 2012)

Vanderbilt Law Review, Volume 65, Number 2 (March 2012).

The Vanderbilt Law Review is proud to announce the publication of our March issue.



Robert P. Bartlett, III, Making Banks Transparent, 65 Vand. L. Rev. 293 (2012).

Christine N. Cimini, Undocumented Workers and Concepts of Fault: Are Courts Engaged in Legitimate Decisionmaking?, 65 Vand. L. Rev. 389 (2012).

Brandon L. Garrett, Eyewitnesses and Exclusion, 65 Vand. L. Rev. 451 (2012).

Jonathan Remy Nash, On the Efficient Deployment of Rules and Standards to Define Federal Jurisdiction, 65 Vand. L. Rev. 509 (2012).



Adam Pié, The Monster Under the Bed: The Imaginary Circuit Split and the Nightmares Created in the Special Needs Doctrine’s Application to Child Abuse, 65 Vand. L. Rev. 563 (2012).

Geraldine W. Young, A More Intelligent and Just Atkins: Adjusting for the Flynn Effect in Capital Determinations of Mental Retardation or Intellectual Disability, 65 Vand. L. Rev. 615 (2012).

Are you interested in writing a response to one of these pieces? Visit Vanderbilt Law Review En Banc for more details.


Virginia Law Review 96:4 (June 2010)


Virginia Law Review 96:2 (April 2010)


Virginia Law Review – In Brief – 4/7/2010


In Brief, the online companion to the Virginia Law Reviewrecently published an essay by David Horton concerning the upcoming Rent-a-Center v. Jackson case, scheduled for oral arguments before the Supreme Court in April 2010, which the author argues will have “profound implications” for the future of American dispute resolution.  The essay is entitled, “The Mandatory Core of Section 4 of the Federal Arbitration Act.”

Professor Horton writes: “The issue before the Court is not the merits of Antonio Jackson’s civil rights lawsuit against his former employer, nor even the validity of the mandatory arbitration contract that he was required to sign before he could begin work. Instead, the Court must decide whether Jackson—and the hundreds of millions of other employees, consumers, and franchisees who are subject to mandatory arbitration clauses—have a non-waivable right to challenge the fairness of such provisions in federal court. Because the Federal Arbitration Act (‘FAA’) allows courts to nullify one-sided arbitration clauses under the unconscionability doctrine, the judiciary has traditionally served as a bulwark against harsh dispute resolution terms. Yet the contract at issue in Rent-a-Center expressly gives the arbitrator, not courts, the sole authority to decide whether ‘any part of this Agreement is void.'”

[Read More]


Virginia Law Review 96:1 (March 2010)


Virginia Law Review 95:8 (December 2009)

VOLUME 95      NOVEMBER 2009     ISSUE 8

Virginia Law Review 95:8 (December 2009)


Making Good on Good Intentions by Katharine T. Bartlett

The State of State Anti-takeover Law by Michal Barzuza


Incarceration, Accommodation, and Strict Scrutiny by James Nelson

Internet Radio: The Case for a Technology Neutral Royalty Standard by Andrew Stockment


Virginia Law Review 95:7 (November 2009)

VOLUME 95      NOVEMBER 2009     ISSUE 7

Virginia Law Review 95:7 (November 2009)


Interrogation Stories by Anne M. Coughlin

Constitutional Enforcement by Proxy by John F. Preis

Counterinsurgency, The War on Terror, and The Laws of War by Ganesh Sitaraman


The Free Exercise Rights of Religious Institutions: Church Property and the Constitutionality of Virginia Code § 57-9 by Fiona McCarthy