Cross-Subsidies: Government's Hidden Pocketbook

58 Pages Posted: 11 Oct 2017 Last revised: 5 Nov 2020

See all articles by John R. Brooks

John R. Brooks

Georgetown University Law Center

Brian D. Galle

Georgetown University Law Center

Brendan S. Maher

Texas A&M University School of Law

Date Written: October 10, 2017

Abstract

Governments can use regulation to pay for public goods out of the pockets of consumers, rather than taxpayers. For example, the Affordable Care Act underwrites care for women and the infirm through higher insurance premium payments by healthy men. Building on a classic article from Richard Posner, we show that these “cross-subsidies” between consumers are a common feature of modern law, ranging from telecommunications to intellectual property to employee benefits.

Critics of the ACA, and even some of its supporters, argue that taxes would be a better choice. Taxes are said to be more transparent, and to fit better with the recommendations of public finance economics. We show how these same arguments can be extended to many other contemporary cross-subsidies.

We also argue, however, that the critics may well be wrong. Drawing on recent theoretical and empirical advances, we show that cross-subsidies can be more efficient than taxes, especially when they are used to redistribute wealth on grounds other than income, such as the ACA’s transfer from men to women. We then apply our analysis to several key contemporary cross-subsidies, including personal-injury law, patents, class action lawsuits, paid family leave, and of course the ACA.

Keywords: Cross-Subsidies, Insurance, Tax and Transfer, Double Distortion, Intellectual Property, Atkinson-Stiglitz, Employee Benefits

Suggested Citation

Brooks, John R. and Galle, Brian D. and Maher, Brendan S., Cross-Subsidies: Government's Hidden Pocketbook (October 10, 2017). Georgetown Law Journal, Vol. 106, pp. 1229-86 (2018), Available at SSRN: https://ssrn.com/abstract=3050674

John R. Brooks

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Brendan S. Maher

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

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