The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Geoffrey Brennan
• Preface
• Acknowledgments
• The Power to Tax
• 1.: Taxation In Constitutional Perspective
• 1.1.: The Notion of a “constitution”
• 1.2.: The Logic of a Constitution
• 1.3.: The Means of Constitutional Constraint
• 1.4.: The Wicksellian Ideal and Majoritarian Reality
• 1.5.: The Power to Tax
• 1.6.: The Enforceability of Constitutional Contract
• 1.7.: Normative Implications
• 2.: Natural Government a Model of Leviathan
• 2.1.: Leviathan As Actuality and As Contingency
• 2.2.: Monopoly Government and Popular Sovereignty
• 2.3.: The Model of “leviathan”: Revenue Maximization
• 2.4.: The Model of Leviathan As Monolith
• 2.5.: The Constitutional Criteria
• 3.: Constraints On Base and Rate Structure *
• 3.1.: Government As Revenue Maximizer Subject to Constitutional Tax Constraints
• 3.2.: Tax-base and Tax-rate Constraints In a Simple Model
• 3.3.: One Among Many
• 3.4.: Tax Limits and Tax Reform
• Appendix: Progression In the Multiperson Setting
• 4.: The Taxation of Commodities
• 4.1.: The Conventional Wisdom
• 4.2.: Constitutional Tax Choice
• 4.3.: Alternative Forms of Commodity Tax: the Choice of Base
• 4.4.: Uniformity of Rates Over Commodities
• 4.5.: Uniformity of Rates Over Individuals
• 4.6.: Discrimination By Means of the Rate Structure
• 4.7.: Summary
• Appendix
• 5.: Taxation Through Time Income Taxes, Capital Taxes, and Public Debt
• 5.1.: Income Taxes, Capital Taxes, and Public Debt In Orthodox Public Finance
• 5.2.: The Timing of Rate Announcement
• 5.3.: Income and Capital Taxes Under Perpetual Leviathan
• 5.4: Leviathan’s Time Preference
• 5.5.: The Time Preference of the Taxpayer-citizen With Respect to Public Spending
• 5.6.: The Power to Borrow
• 5.7.: Conclusions
• 6.: Money Creation and Taxation
• 6.1.: The Power to Create Money
• 6.2.: Inflation and the Taxation of Money Balances: a “land” Analogy
• 6.3.: Inflation and the Taxation of Money Balances
• 6.4.: Inflationary Expectations Under Leviathan
• 6.5.: Inflation, Wealth Taxation, and the Durability of Money
• 6.6.: The Orthodox Discussion of Inflation As a Tax
• 6.7.: The Monetary Constitution
• 6.8.: Inflation and Income Tax Revenue
• 6.9.: Monetary Rules and Tax Rules
• 7.: The Disposition of Public Revenues *
• 7.1.: The Model
• 7.2.: Public-goods Supply Under a Pure Surplus Maximizer: Geometric Analysis
• 7.3.: The Surplus Maximizer: Algebraic Treatment
• 7.4.: The Nonsurplus Maximizer
• 7.5.: Toward a Tax Policy
• 8.: The Domain of Politics
• 8.1.: Procedural Constraints On Political Decision Making
• 8.2.: The Rule of Law: General Rules
• 8.3.: The Domain of Public Expenditures
• 8.4.: Government By Coercion
• 9.: Open Economy, Federalism, and Taxing Authority
• 9.1.: Toward a Tax Constitution For Leviathan In an Open Economy With Trade But Without Migration
• 9.2.: Tax Rules In an Open Economy With Trade and Migration
• 9.3.: Federalism As a Component of a Fiscal Constitution
• 9.4.: An Alternative Theory of Government Grants
• 9.5.: A Tax Constitution For a Federal State
• 9.6.: Conclusions
• 10.: Toward Authentic Tax Reform Prospects and Prescriptions
• 10.1.: Taxation In Constitutional Perspective
• 10.2.: Tax Reform As Tax Limits
• 10.3.: Tax-rate Limits: the Logic of Proposition 13
• 10.4.: Tax-base Constraints
• 10.5.: Aggregate Revenue and Outlay Limits: Ratio-type Proposals For Constitutional Constraint
• 10.6.: Procedural Limits: Qualified Majorities and Budget Balance
• 10.7.: Toward Authentic Tax Reform
• Epilogue

C’est une expérience éternelle que tout homme qui a du pouvoir est porté à en abuser; il va jusqu’à ce qu’il trouve des limites.

—Montesquieu, De l’Esprit des Lois

The power to tax involves the power to destroy.

—Chief Justice John Marshall, McCulloch v. Maryland

Foreword

The Power to Tax was a book waiting to be written.1 This is so not just because the tax revolts sweeping across the United States in the late 1970s cried out for an analytic interpretation that orthodox public finance was apparently incapable of providing. Rather, The Power to Tax was waiting to be written in the more academic-intellectual sense that the Leviathan approach to taxation filled a logical gap in the array of approaches available at that time. In this sense, The Power to Tax represents a kind of tent peg—or logical compass point—in the intellectual territory that tax theory marks off.

As of 1980, there were on offer two broad approaches to normative tax analysis. First, there was the approach provided by the family of orthodox public finance models. The characteristic feature of these models was the direct application of normative criteria to tax arrangements—sometimes, derivatively, to particular taxes, but, more commonly, to the tax system as a whole. Within this family, there were distinct strands. The two most important of these were the more traditional Musgravian strand, derived from R. M. Haig, Henry Simons, and Georg Schanz, in which the central ambition was the achievement of an equitable tax system based on ability to pay; and the so-called optimal tax approach, which involved the direct application of the utilitarian normative scheme to tax design questions. There were other, less common variants, but all variants shared the implicit benevolent despot assumption about the operation of political processes. Effectively, political constraints were ignored in the determination of tax policy (the despot aspect); and policymakers were assumed to be driven solely by the desire to “do good” as the public finance policy advisor would discern it (the benevolence aspect).

The second approach of orthodox public finance models on offer was the public choice one. The distinguishing feature of this approach was the rejection of the benevolent despot model of public finance orthodoxy: a formal model of political process was to be an explicit part of any satisfactory approach to taxation, and the actors within any such model had to exhibit the same motivational patterns as were ascribed to taxpayers. Again, there are a variety of strands within this family, many of them derived from Buchanan’s own work. One broad division is between those models that treat taxes as essentially endogenous—that is, as themselves emerging from political determination—and those that treat taxes as exogenous, affecting political outcomes but themselves determined through some other process. For example, in the former camp lie the original Knut Wicksell and Eric Lindahl models. In the latter lies James M. Buchanan’s approach in Public Finance in Democratic Process and in the papers contained in part 2 of volume 14 in the Collected Works, Debt and Taxes.2

We can, on the basis of this broad categorization, picture the public choice approach and public finance orthodoxy as lying at opposite ends of a two-dimensional spectrum reflecting the underlying political models in play. The two dimensions of this spectrum reflect, on the one hand, the degree of political constraint and, on the other hand, the motivational assumptions made about political agents—the degree of despotism and the degree of benevolence. In this sense, we could imagine a two-dimensional map of intellectual possibilities, within which various accounts of taxation policy might be located. However, this notional map only had the two possible polar extremes in action: the map lacked, as it were, a cornerpost. And it was that cornerpost that the Leviathan approach to taxation, which The Power to Tax laid out and developed, sought to supply. The underlying motivating question was simple: Why not borrow the motivational assumptions standard in public choice theory and put them together with the assumptions about policymaker discretion taken from public finance orthodoxy? One could then develop an account of preferred tax policy within that hybrid political model. After all, there is available on the shelf in mainstream economics an extremely familiar model of the exercise of discretionary market power—namely, the standard model of monopoly. Why not adapt that familiar model to the tax context? Responding to that possibility gave rise to the model of the revenue-maximizing Leviathan—and the derivation of a tax constitution specifically in the face of a Leviathan government.

It is difficult now, some twenty years later, to be confident as to what exactly the authors’ motivations and expectations for this model were. There is no doubt that at some level the mere exploration of logical possibilities for its own sake initially played some part. But two general considerations also weighed. The first was the force of the public choice insistence that the same basic motivational assumptions should be ascribed to market agents and political agents. The second consideration was that, as a matter of casual empiricism, it seems clear that policymakers have some discretion over policy choice: it is difficult otherwise to explain a market for policy advisors. Putting these two general considerations together leaves the Leviathan model as the logical outcome.

The interesting aspect in the development of the model was its capacity to turn so many of the traditional nostrums of tax orthodoxy on their heads.3 Moreover, the Leviathan model lent support to some of the more legally derived tax desiderata, such as the absence of retrospectivity, which are difficult to derive from the standard public finance approach. (Specifically, an unexpected retroactive increase in taxes would generate revenue in an efficient way because there would be no behavioral response among taxpayers and, hence, no inefficiency generating substitution effects.) The effect was that the Leviathan approach was construed by critics as a wholesale attack on public finance orthodoxy, both directly by questioning the orthodoxy’s central claims and indirectly by exposing its ambiguous stand on issues like retroactivity. Probably for this reason, The Power to Tax proved a controversial book.

Interestingly, one of the grounds for criticism—or for treating the arguments in the book as irrelevant and therefore ignoring them—was that the model of politics implied was implausible. That such a claim should issue from proponents of public finance orthodoxy is more than a little ironic, since models of politics, plausible or otherwise, play no role in that tradition. But the truth is that The Power to Tax is not a model of politics so much as it is a model of political agent motivation: To the extent that there is a model of politics here, it is borrowed directly from public finance. This is the model of the despot but here an egoistic despot rather than a benevolent one.

Conceivably, as an expositional matter, it may have been better to attempt a reasonably elaborate model of dictatorial government, with a clear specification of the constraints to which such a government is likely to be subject—for example, the need to buy the support of salient groups (including the military), the need to suppress those who might otherwise launch a coup attempt, and so on. Alternatively, the analysis might have been lodged formally within one of the standard public choice models of democracy with imperfectly constrained political agents, such as the strategic-agenda-setter model or the Niskanen bureaucracy model. But each of these courses ran the risk of cluttering the central argument with material that was not absolutely central and of disguising the simplicity of the core logical claims. What The Power to Tax provides is a monopoly model of government, with the emphasis on the monopoly connection and with the simple analytics designed to underline the monopoly analogue. The thought was that the central messages would be more arresting if derived from a model of the behavior of a discretionary agency that most readers found familiar—so familiar, indeed, as to be almost unquestionable.

The reception to The Power to Tax was so vehement and the authors’ purpose so misunderstood that the ink was scarcely dry before it became necessary to begin an exercise of clarification and defense of the whole approach. This exercise initially took article form, but eventually emerged as a more detailed account of the whole constitutional paradigm in The Reason of Rules.4 Of course, there is no sense in which the constitutional approach presupposes Leviathan government. But, equally, there is no point in constitutional rules if those rules only prevent wholly benevolent persons from doing good. And there is no point in constitutional rules other than simple majority rule if majority rule robustly ensures maximally desirable outcomes. The whole point of fiscal rules (or fiscal norms), whether of the kind derived in orthodox public finance or the kind derived from the Leviathan model or other variants of the public choice approach, is that the rules or norms operate to support better overall outcomes than would prevail in their absence: they necessarily operate in the face of other, imperfect institutional devices. In this sense, what is possibly surprising about the Leviathan approach is how much it shares with orthodox public finance and, for that matter, with the orthodox theory of the state (in which connection, see Anthony de Jasay’s The State, which also treats the state as a monolithic actor).5 Specifically, both approaches share a similar presumption about the degree of political agent discretion and a similar presumption about the desirability of politically independent fiscal rules. Where they differ is that in The Power to Tax tax policymakers and taxpayers have identical motivations, whereas in the orthodox approach, tax policymakers and taxpayers have utterly different motivations. In this sense, The Power to Tax is clearly in the public choice tradition: the insistence on motivational symmetry is a characteristic feature of the public choice approach, and it is in this dimension that The Power to Tax and the orthodox public finance approach diverge.

Geoffrey Brennan

Australian National University
1998

[1. ] Geoffrey Brennan and James M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (New York: Cambridge University Press, 1980), volume 9 in the series.

[2. ] James M. Buchanan, Public Finance in Democratic Process: Fiscal Institutions and Individual Choice (Chapel Hill: University of North Carolina Press, 1966), volume 4 in the Collected Works.

[3. ] The initial summary statement of the central analytics was in article form. See Geoffrey Brennan and James M. Buchanan, “Towards a Tax Constitution for Leviathan,” Journal of Public Economics 8 (December 1977): 255-73; see also volume 14 in the series, Debt and Taxes.

[4. ] For example, Geoffrey Brennan and James M. Buchanan, “The Normative Purpose of Economic ‘Science’: Rediscovery of an Eighteenth-Century Method,” International Review of Law and Economics 1 (December 1981): 155-66, and Geoffrey Brennan and James M. Buchanan, “Predictive Power and Choice among Regimes,” Economic Journal 93 (March 1983): 89-105; both articles are in Economic Inquiry and Its Logic, volume 12 in the series. Geoffrey Brennan and James M. Buchanan, The Reason of Rules: Constitutional Political Economy (Cambridge: Cambridge University Press, 1985), volume 10 in the series.

[5. ] Anthony de Jasay, The State (Oxford: Basil Blackwell, 1985); republished by Liberty Fund in 1998.