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

1.7.

Normative Implications

So far in this preliminary discussion, we have indicated something of what is involved in an analysis of taxation from a constitutional perspective. We have not, however, indicated why we believe this perspective to be either empirically relevant or normatively desirable.

We could in part justify our particular approach in the negative sense by appeal to the intellectual poverty of the standard alternative—the failure of orthodox tax analysis to incorporate a plausible political-institutional framework; its naive application of the “equi-revenue comparison” its appeal to external and apparently arbitrary ethical norms; its obstinate neglect of the expenditure side of the budget; and so on. All of these justifications would have some validity. The benevolent dictator-ethical observer-philosopher king model of political process that underlies the standard tax theory is pretty much bereft of empirical relevance in observable governments—Western or otherwise. The assumption that the aggregate level of revenues remains invariant with respect to alternative means of raising it, however convenient analytically, is an extremely dubious and potentially very misleading one. The neglect of the public-spending benefits and costs, and the distribution of them, does emerge as a significant gap in the standard analysis.

We think that we can offer positive justification for adopting the constitutional perspective on tax questions, however. We think that there is substantive analytical content in the taxpayer’s constitutional choice problem, both conceptually and empirically. We think that our analysis sheds considerable light on the attitude of taxpayers that is reflected in the tax revolt of the late 1970s. Perhaps more important, however, we think that the taxpayer’s constitutional choice calculus offers the only legitimate basis for the derivation of possible norms for tax reform. The use of this calculus allows us to indicate directions for what may be called authentic tax reform, changes in tax structure that may prove beneficial to all citizens-taxpayers when evaluated at the constitutional stage of decision.

The preoccupation of the standard analysis with the distribution of tax burdens “in-period” effectively denies the possibility of agreement among taxpayers. Each identifies his own economic position fully; and the tax reform “game” is strictly zero-sum. In this setting, the only possibility is to call down external norms that specify what a “fair” tax system would be—what tax burden each taxpayer “should” face. And such norms must be external, because the (internal) judgments about the desired distribution of tax burdens (even if tempered by moral or altruistic concerns) held by different individuals are necessarily mutually exclusive.

As we move to the constitutional setting, however, the scope for agreement seems naturally to expand. The presence of extensive ignorance about his future position separates each individual from the identifiable special interest he holds for himself in any in-period setting. In this constitutional setting it becomes possible to apply the generalized contractarian criterion for ultimate “tax reform.” Particular fiscal institutions can be designated as “good” or desirable because individuals agree that they are desirable. The normative judgments to be applied emerge out of the constitutional consensus itself, rather than from the moral perceptions of one who deems himself close to God.

To be sure, the veil of ignorance may not be complete, and interpretations and predictions about the workings of alternative rules may differ. Agreement may emerge only after much discussion, compromise, and complex trading in alternative constitutional provisions. It could not be expected that everyone or indeed anyone would find any agreed-on constitution “perfect”—but for desirability in our sense, it is enough that the constitution be agreed.

The ultimate test of desirability can of course only be agreement itself. Purely presumptive reasoning alone cannot be expected to define a set of tax rules that would be mutually advantageous—only a set of tax rules that might be predicted to be so. In this sense, the normative conclusions that issue from our discussion are strictly provisional. All that we can be seen as doing is offering a set of tax rules that might form an agenda for the fiscal constitutional convention. This may seem to be a rather modest object! But it is, we believe, both ethically superior to and practically more relevant than the orthodox tax advocacy alternative.

2.

Natural Government

A Model of Leviathan

The aim of this chapter is to introduce, and to justify in some measure, the model of government or political process within which our discussion is to be conducted and which provides the basis for the derivation of the analytical foundations of a tax constitution. The model embodies the predicted behavior of government in its postconstitutional operation. Some such model clearly must inform any consideration of constitutional choice. The selection among alternative tax rules or arrangements to be made by the prospective taxpayer-voter-beneficiary at some constitutional stage must depend critically on the predictions made about how the political process may operate during periods when the rules to be chosen are to remain in force. This statement remains true whether the prospective taxpayer-beneficiary considers a change in the constitutional rules from the perspective of a well-identified and historically determined position or some de novo selection of a whole set of constitutional arrangements from an “original position” and behind at least a partial veil of ignorance.

We should first emphasize that our whole analysis falls within what may be called the “economic” approach to governmental process. This term is used to distinguish the basic conception of government and politics from that which might be called the “truth-judgment” or “scientific” approach. Politics or governmental process is viewed as an institutional setting within which persons and groups interact to pursue their own ends, whatever these might be, and whatever might be the roles or positions persons may take, either as decision makers or as those forced to adjust behavior to the decisions of others. In such a conception, there are no “solutions” to political-governmental problems in any sense akin to those encountered in problems of “science,” as ordinarily understood. And governmental-political institutions are inappropriately modeled if they are interpreted as devices or mechanisms for finding the independently “best” or “optimum” answers or solutions to problems that arise.

Even with the inclusive economic approach to politics, however, the model we describe and use is highly unconventional in its basic assumptions. In the first place, we reject the benevolent, potentially efficient despotism that is the implicit political model dominant in the conventional normative policy framework, in fiscal theory and elsewhere. Such a model is variously articulated in terms of the “social welfare function” of the Samuelson-Bergson type; in the “theory of the public household,” familiar to public-finance-taxation specialists in either the Pigovian or the Musgravian tradition; in the form of policy setting devised by Tinbergen and Hansen with its focus on assignment problems and ends-means distinctions; or in the work of the modern-day utilitarians, writing under the rubric of “optimal taxation.”

One may, of course, argue that these variants of the orthodox normative approach do not need to incorporate a model of how political processes operate since they are all designed for the purpose of proffering advice to governments, in any shape or form, advice grounded on ethical norms. Nonetheless, there is contained in all of these variants the implicit belief, or faith, that the politicians-bureaucrats, the audience for whom the normative advice is designed, not only have the power to determine governmental-political outcomes, but also are likely to find the ethically based arguments compelling.

It is perhaps not surprising that our model of political process departs from the above-mentioned variants of fiscal orthodoxy. But our model also requires that we jettison the image of the fully constrained politician-bureaucrat that emerges in the major alternative to these variants, the model represented in the work of early public-choice specialists, notably those in the Wicksellian tradition. In such a public-choice model, the median voter in majoritarian democracy is presumed to drive the whole political machine so as to generate results that are broadly reflective of the wishes of the electorate, or at least the relevant subset of it. Relatively little of the emphasis in this literature has been devoted to arguing for the efficacy of the political mechanism as modeled, and, indeed, considerable effort has been aimed at demonstrating the major inadequacies of majoritarian democracy as a means of making efficient collective decisions. These early public-choice models are severely limited, however, in that they have been almost entirely demand-driven. Political competition among politicians and parties along with periodic elections are presumed to constrain outcomes within a narrow range of possibilities. In these models, government is neither despotic nor benevolent; in a very real sense, “government,” as such, does not exist.

Our approach returns us somewhat more closely to the traditional model of the benevolent despot, discussed above, than to the public-choice alternative. In our conception, “government” in the sense of “governing” does indeed exist; and it is viewed as monolithic, at least in the model used for derivation of the tax constitution. We depart from the traditional approach simply by dropping the presumption of benevolence. And who would want to proffer advice to a nonbenevolent entity? Our shift of emphasis toward problems of constraining government follows almost directly from the shift of image from benevolence to indifference or even possible malevolence.

Specifically, we assume that the political process, as it operates postconstitutionally, is not effectively constrained by electoral competition as such, and that the electoral process can appropriately constrain the natural proclivities of governments only when it is accompanied by additional constraints and rules imposed at the constitutional level. The major objective of this book is to delineate the subset of these other, nonelectoral constraints relating to the taxing powers that might be selected by the citizen-taxpayer.