Saturday, November 21, 2009

"Just Compensation" Can Lead to More Government Takings

Ian Ayres

Crosspost from Freakonomics:

We are trapped in a world with far too few IRS audits. Law-abiding tax payers hate being audited and their representatives in Congress have heard the message loud and clear — strangling the ability of the IRS to conduct field examinations. The problem with the current state of affairs is that non-law-abiding tax payers find it far too easy to avoid paying their fair share.

Barry Nalebuff and I have a new column in Forbes (Winning the Audit Lottery) that suggests a fairly simple solution to this regulatory failure. The IRS should start compensating people for the inconvenience of an audit. The idea is the brainchild of (my coauthor) Joe Bankman, who has estimated that a “payment of $3,000 per audit would overcompensate almost all taxpayers.” The idea is also discussed in this interesting article by Sarah Lawsky.

What really interests me about Bankman’s idea is that requiring the government to pay for its takings might lead to more takings. This is very different from the way we usually think about the impact of compensation:

A central idea behind the Constitution’s Takings Clause is to reduce government’s inclination to take too much. A government that is forced to compensate for the exercise of its eminent domain power is less likely to engage in value-reducing land grabs.

But requiring compensation might increase the willingness of government to take. As Barry and I wrote:

The big hope is to end the stranglehold that anti-IRS forces have on compliance efforts. . . . Absent compensation, Congress has vetoed efficient audit programs–setting the audit rates far below their optimal level. Here’s a rare case where forcing the government to pay for something is likely to increase its demand.

The government, in deciding whether to take, is in some ways on both sides of the market, acting as both a buyer and a seller. The normal intuition that the just compensation requirement will dampen government’s demand to take conceives of the government as a buyer. But in a representative government, the amount of takings will be partly determined by the willingness of representatives to sell at a particular price. When the selling price is zero — as with current tax audits, government as representatives of sellers may choose to sell very little. (This possibility was to my knowledge first seen in Bruce A. Ackerman’s classic Private Property and the Constitution.)

Could Compensation Cause Wrongful Imprisonment?

The possibility that compensation will cause more taking leads to truly perverse possibilities. For example, in 2008 a Florida statute went into effect compensating individuals who have been wrongfully incarcerated $50,000 a year. (Amazingly, our Constitutional requirement of just compensation does not apply because government has not taken the liberty of the wrongfully incarcerated as long as he or she received a sufficiently fair trial!) The audit compensation logic suggests that offering this compensation might actually lead to an increase in wrongful incarceration. In a world without compensation, citizens might require that the criminal justice system take extra care to make sure that the innocent are not imprisoned. But in a world with up to $2 million in compensation, citizen-voters may instruct their representatives that they are not as concerned about having error-free adjudication and, on the margin, they can live with a few more wrongful incarcerations.

Let me be clear: I don’t think it is likely that compensation requirement will lead to much of a change — one way or the other — on the number of wrongful convictions. Bureaucrats deciding whether or not to take might not really care whether government has to pay compensation. Indeed, the potential insensitivity of government takings to the cost of compensation has led some advocates to argue for additional judicial scrutiny and oversight. For example, because the Fifth Amendment prohibits taking of “private property … for public use, without just compensation,” some people would like to have courts only allow takings that independently satisfy a “public use.” The Supreme Court rebuffed one such effort in its 2005 Kelo v. New London decision, which upheld the exercise of eminent domain by New London, Connecticut, to condemn homes in a 90-acre blue-collar residential neighborhood:


The city planned to lease the land for $1 for 99 years to a private developer so that the developer could build a waterfront hotel, office space, and higher-end housing as well as “a number of traditional public uses, like a marina, a walkway, a proposed Coast Guard Museum, and public parking for the museum and the adjacent Fort Trumbull park.” (Just last Monday, Pfizer announced that it was closing the anchor R&D headquarters which was envisioned as the anchor of the development.)

But the audit story teaches that the Kelo plaintiffs might have been better off if the takings clause did not require just compensation. In a world without compensation, the land owners might have been better able to rouse political resistance to the ill-fated plan (just as audit victims have effectively organized to almost completely extinguish the field audit). Uncompensated takings are so unfair that you might need a really good public reason to justify imposing the concentrated burden.

Just Charges for Government Givings?

An analogous perversity arises in the analysis of government “givings.” A government giving (as coined by Avi Bell and Gideon Parchomovsky in a classic Yale Law Journal article) is a circumstance where a government action bestows a benefit on a private citizen. While the Constitution requires just compensation after a government taking, it does not require a “just charge” after a government giving. One example of a just charge is when a government levies a special assessment on property owners who benefit from new sidewalks being installed on their land.

Without “just charges” we might worry that government would not have adequate incentives to bestow benefits on its citizens; that government would undergive. But in deciding whether to impose a special assessment in conjunction with a giving, the government is acting now not only as a seller but also as representatives of buyers. A constitutional duty to impose just charges might lead to fewer givings as citizens instruct their representatives that they can do without sidewalks if they are going to be charged for them.

This is just a flip of the original audit idea. In assessing the impact on government takings (and givings) of mandating compensation (and charges), we need to not only assess the first-order bureaucratic impact of the cash flow, but the political blow-back when constituents call their representatives.

Older Posts
Newer Posts