Professor Liscow on Taxation, Teaching, and a New Approach to Behavioral Economics

facade of the U.S. Treasury Department
The facade of the Treasury Department. © 2010 Eric Weaver via Creative Commons.

Zachary Liscow ’15 received tenure as Professor of Law on Jan. 1, 2022. His research seeks to understand policy levers that can address income inequality and the role that tax policy should play in combating inequality versus other legal rules. His research on infrastructure costs with co-author Leah Brooks has been widely cited in outlets like Bloomberg, the Brookings Institution, The Week, and on NPR. In this Q&A, Liscow discussed his research on tax policy, his collaboration with Professor Guido Calabresi Professor of Law Daniel Markovits ’00 reassessing behavioral law and economics, and his approach to teaching his Federal Income Taxation course.


You have studied the realization rule, which requires property to be sold before gains are taxed. What can be done to increase the fairness and efficiency of this part of the tax system?

Zachary Liscow
Though the “realization rule” might sound technical, it is currently one of the key barriers to having a more just tax system. A recent ProPublica investigation of the tax returns of many of the U.S.’s billionaires showed that they pay very little in taxation. For example, between 2014 and 2018, Jeff Bezos got richer by $99 billion, but paid less than 1% of that in taxes. The reason is that Bezos got richer because Amazon stock skyrocketed in value. But he sold little stock, so he wasn’t taxed on the gains.

This is all quite problematic for fairness because it means that many of the wealthiest Americans pay almost no tax when they get richer, while the vast majority of Americans pay considerable tax when they get richer, from wages in their jobs. This is also problematic for efficiency, in part because revenue will need to be raised elsewhere, likely in ways that discourage work and investment. Of course, taxing these gains among the superrich wouldn’t be costless; for example, some future entrepreneurship might be discouraged. But part of why taxing these gains won’t cause as much harm to efficiency is that current billionaire stockowners already own the stocks, so there’s not much they can do to reduce investment or work less to avoid the tax.

What can be done? My work found that the public finds taxing these gains as income deeply unintuitive. It seems like this is largely the case because people don’t consider the gains to even be “income” until they are sold.

So, the solution is a complex legal, economic, and political puzzle — and it is worth thinking creatively here. Achieving greater equity and efficiency for our economic and tax policy in the face of puzzles like this is a lot of what I work on. Here are some options:

  • Tax wealth gains, even if they gains are not sold, perhaps for very high-wealth individuals, notwithstanding some commonplace intuitions to the contrary. In fact, a senator developed such a plan in the fall. And the White House just released a similar plan.
  • Tax wealth gains at death. Currently, when someone dies with appreciated assets, those gains are not taxed as income to anyone. It would be much fairer — and raise considerable income from the well-off — to tax gains above a certain threshold (say, $10 million) at death.
  • Raise corporate taxes, which would indirectly tax some of these gains.
  • Tax corporations themselves on increases in the value of their stock. That might be more politically feasible because the public tends to favor taxing businesses, especially large ones. But this would still indirectly tax those largely untaxed stock gains.
  • Mandate the distribution of dividends (perhaps as a share of profits), as Brazil currently does. Since dividends are taxed, this would also directly tax those gains.

Behavioral law and economics have influenced policy decisions in areas from consumer protection to public health to policing. Why do you think it is time for a new approach, which you and Professor Daniel Markovits term “democratic law and economics”?

We argue that behavioral economics — which studies systematic mistakes that economists think people make and recommends policies to address those mistakes — risks allowing experts to impose their own preferences on the public.

Traditionally, economic experts have, to a large extent, avoided this problem because they were merely helping people pursue the behavior that the people themselves would undertake. But, the whole point of behavioral economics is that such behavior is often not in people’s interest. Behavioral economics has nevertheless continued to technocratically make policy recommendations, risking the imposition of the expert’s opinions. This is particularly problematic if economic experts do not look or think like the rest of the population. They are deeply unrepresentative demographically and have quite different policy views.

We propose a different approach, which we call democratic law and economics. Rather than dictating what the right policy or action is, behavioral economists could instead inform representative samples of ordinary people about the evidence, including specifically about their own behavioral biases, and let them decide for themselves. Those decisions, rather than experts’ opinions alone, then inform policymakers, who could still incorporate other things including expert advice. Our approach harnesses the insights of behavioral economics, but in a way that lets the people themselves, rather than the behavioral expert, be the arbiter of the good life.

This term you are teaching Federal Income Taxation. What are some of the topics covered and what do you hope your students will take away from the course?

I cover the fundamentals of income taxation and link this to issues for both lawyers and policymakers today. For example, we cover the fundamentals of the “realization rule” and then link this to contemporary policy debates. Throughout, we focus on the traditional tax policy criteria of efficiency, equity, and simplicity.

I teach good lawyerly skills like reading a statute, since the course is focused on statutes as much, if not more, than any other course in law school. The Internal Revenue Code is long and complicated, and often the answer is in there. One just needs to figure out how the pieces fit together!

But, in linking the course back to contemporary policy debates, I also emphasize how central taxation is to our society for achieving whatever social goal that you want — economic justice, economic growth, environmental protection, etc. Taxation is central to all of these things. Indeed, while taxation can be very technical (see the “realization rule”), at the same time, taxation is also core to our democratic politics. Consider, for example, the Boston Tea Party and, more recently, the TEA (“taxed enough already”) Party and protests over how little some large corporations pay in tax. I want students to think about the tax system as citizens, which is all the more valuable now that they understand more of the hidden technical details of taxation.