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2.: Natural Government A Model of Leviathan - James M. Buchanan, The Collected Works of James M. Buchanan, Vol. 9 (The Power to Tax: Analytical Foundations of a Fiscal Constitution) 
The Collected Works of James M. Buchanan, Vol. 9 The Power to Tax: Analytical Foundations of a Fiscal Constitution, Foreword by Geoffrey Brennan (Indianapolis: Liberty Fund, 2000).
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Foreword and coauthor note © 2000 Liberty Fund, Inc. © 1980 Cambridge University Press.
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The very principle of constitutional government requires it to be assumed that political power will be abused to promote the particular purposes of the holder; not because it always is so, but because such is the natural tendency of things, to guard against which is the especial use of free institutions.
—J. S. Mill, Considerations on Representative Government, in Essays on Politics and Society, vol. 19, Collected Works, p. 505
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.
Leviathan as Actuality and as Contingency
Because the model of political process is unconventional, especially in the English-language tradition,1 it may be useful to try to justify our underlying perceptions before presenting the basic analytics. In so doing, we emphasize the distinction to be made between a justification of theory as a description of reality on the one hand and as an analytic device to be employed in providing foundations for constitutional construction on the other. From theory in the first sense, refutable implications may be derived that will, when tested, add to our positive understanding. And we do not, by any means, wish to reject the explanatory potential of the state-as-monopoly model. In the second sense, however, theory only allows implications to be drawn concerning what might occur rather than what will be predicted to occur. For example, it may be difficult empirically to test the hypothesis that a flood will occur in a particular locality with a 0.01 probability each year. Nonetheless, the theory from which such a predictive hypothesis is derived may be used as the normative basis for taking action toward avoiding disastrous flood damage.
Another example much more familiar to economists may be suggested here, even if its many complexities must be acknowledged. Consider Homo economicus—the selfish brute who devotes himself single-mindedly to maximizing the present value of his measurable wealth. As a psychologically descriptive hypothesis of the way that individuals do in fact behave, this model of man may be unacceptable. Any theory that depends for its predictions on the hypothesis that all persons behave in such fashion at all times and in all circumstances must, of course, be rejected out of hand from ordinary introspection. It is difficult to deny, however, that this simplistic model of pure economic man has been shown to have powerful explanatory potential.
More important for our purposes, even if the model of pure economic man should be severely limited in its positive explanatory usage, it may prove to be, and has proven to be, very helpful in the comparative analyses of alternative social orders and arrangements. As Sir Dennis Robertson observed, we need not deny the existence of “love” to believe that love is indeed something precious and worthy of preserving and hence something to be economized upon. As he suggested, the task of the economist is to point out institutional ways and means of economizing on love.2 Or if we prefer to return to Adam Smith’s illustration, we may acknowledge that our butcher and our baker are occasionally, and perhaps frequently, benevolent, but surely we should all feel more secure if the institutional structure is so organized as to make their self-interest coincident with our own rather than the opposite.
In this way, what may appear to be a highly cynical or skeptical model of politics may be justified in much the same way that classical and neoclassical economic theory justifies its economic-man hypothesis, particularly in the context of comparative institutional evaluation. The monopoly-state model of government may be acknowledged to be useful, not necessarily because it predicts how governments always, or even frequently, work, but because there are inherent tendencies in the structure of government to push it toward that sort of behavior implied in the monopolistic model, tendencies that may emerge in settings where constraints are wholly absent. That is, natural government is monopoly government, with all the implications that the word “monopoly” suggests.
Monopoly Government and Popular Sovereignty
The essence of the problem at the constitutional level is how to constrain the natural proclivities of government so as to achieve results that are consonant with those which are desired by the potential taxpayer-voter-beneficiary, as he views his own role in postconstitutional periods from the initial constitutional perspective. As we have noted earlier, current public-choice theory, as well as the prevailing political ethos or public philosophy, has concentrated its attention largely on voting rules and arrangements as the primary means of constraining governmental behavior. Our analysis shifts emphasis to nonelectoral means of achieving these ends. Our object is, of course, not to deny that electoral processes may constrain in some cases over some range, any more than we would seek to deny that dictatorial governments may exercise their discretionary power benevolently in some cases over some range. Rather, we are seeking to show that the assumption that electoral processes are sufficient to constrain self-seeking government is extremely vulnerable. We do so by appeal to a sequence of observations which, taken together, seem to us to support this position fairly thoroughly.
These observations are of three basic types. First, there is the observation that for certain types of decisions in relation to the use of resources, electoral processes are inappropriate even where those processes do generate outcomes congruent with electoral demands. Second, there is a set of purely analytic questions about majoritarian political processes which raise doubts as to whether such processes can be predicted to constrain governments effectively, in all or most cases. Third, there is a set of observations about historical experience—about the growth of government in Western democracies, and attempts by the electorate at large to limit that growth—which suggest that, in fact, democratic electoral processes may not have been constrained. We examine each of these basic types of argument in turn.
Analytical justifications for nonelectoral decision processes. Our point of departure here is the observation that electoral processes could conceivably be used to constrain governments much more severely than is typically the case in Western democracies. Decisions could be taken by popular referenda much more commonly. Nor, as James C. Miller3 has recently argued, are the reasons for avoiding the referendum option entirely technical: computer and telephone voting techniques seem to provide inexpensive means of popular voting (or large sample voting) on an extensive range of issues over which politicians and bureaucrats currently exercise discretion. One might argue—and indeed the whole theory of “representative” democracy must now be dependent on such an argument—that the reason for not relying more extensively on popular government is that it is simply undesirable to do so. Accordingly, one set of arguments that merit investigation here relates to the question as to why one might avoid reliance on majoritarian political process, even where this is taken to provide effective constraint. We offer three arguments along such lines.
1.The constitutional domain. There are aspects of in-period activity that should not be and cannot be, within the terms of constitutional construction, subject to determination by in-period political process. For example, to the extent that the constitution lays down private property rights and laws against interference with those rights, these laws must be interpreted and enforced essentially independently of in-period politics. (Otherwise, a decisive majority might conceivably simply suspend the property rights of minority members—murder of a Republican may become legitimate under Democratic rule.) Once this point is admitted, however, and once it is recognized that the enforcement of such laws requires resources, possibly of some magnitude, it becomes clear that questions of the extent of resources so allocated, and how they are to be used, must over some range be independent of simple majoritarian consent. They must therefore be made independent of in-period political process.
This is an important point and has far-reaching implications. The machinery by which laws are enforced, including not only the judiciary but also the police force, cannot be made obedient to simple majority will. Yet they must clearly be constrained in some way. Their powers must be set forth, and means of enforcement must be found. The “separation of powers,” the presence of courts of appeal, and no doubt purely internal moral constraints all have to be relied on here—in addition to the fiscal constraints we set out in the ensuing chapters. Our point at this stage is simply that electoral constraints, as such, cannot be relied on.
2.Differences between “constitutional” and “in-period” preferences. The rational individual may have preferences at the constitutional level which at the in-period level will have changed in a systematic way. For this reason, he may wish to set aside some in-period electoral outcomes that would emerge, in favor of his constitutional judgments. One of us has explored two examples of this possibility4 in detail elsewhere, but a simple case here may be useful. Suppose that the citizenry feel benign toward the “poor” and, at either the constitutional or postconstitutional level, would desire that substantial welfare payments be financed from tax revenues. Quite apart from the tax costs, these welfare payments would have a net cost in terms of disincentive effects, and at the margin the total of these costs would be equated to the net utility gains attributable to the altruistic inclinations of the citizenry at large. At the constitutional stage of choice, the costs and benefits over the whole sequence of future periods could be taken into account in arriving at some optimal level of welfare. Suppose, however, that no constitutional determination of welfare spending is made and decisions are left to period-by-period politics. In this case, there will be a higher level of welfare or transfer payments than in the case where the determination is made constitutionally. The reason for this difference is that the benefits of the welfare transfers to the current and directly observed generation of recipients (those out of work last period, for example) will be reckoned without adjustments for the disincentive effects on welfare recipients themselves. Potential recipients are observably “poor”; transfers will not make them “poor.” At the constitutional level, however, the possible effects of a transfer program in creating potential recipients can be fully taken into account. The program can be examined ab initio and abstractly.5
The interesting feature of such cases is that individuals may be led to make period-by-period choices that produce a situation that no one of them wants. Further, this result arises not from free-riding prisoners’ dilemma elements in social interactions, but rather from genuine differences between the constitutional and in-period perspectives. These cases are collective analogues of the purely private inclination to create binding “moral” rules by which the individual may constrain his own future actions. The characteristic feature of all such examples is the conflict between the individual’s current and future preferences, as revealed by his actions taken at different times in relation to choices at a specific point in time.6
One additional example of such differences relates to redistribution as “justified” by Rawlsian-type preferences exhibited behind the veil of ignorance. Armed with information about his position in society, the individual may (and generally will) adopt profoundly different attitudes to redistribution from those he might have adopted behind such a veil. In such a setting, constitutional preferences over the income distribution may be embodied in specific fiscal rules that will generate results quite different from those that would be produced under unconstrained majority voting. In general, transfer policies may need to be set constitutionally: in-period electoral process will simply not generate the constitutionally desired results, and this failure will be predicted at the constitutional level of cognition.7
3.Rational ignorance. As emphasized by Downs,8 and elaborated by many other scholars, information about politically provided goods and services is a “public good” in the technical sense. Because the acquisition of such information is costly at the margin, and because the benefits are not fully appropriable to the informed voter, all individuals will rationally remain underinformed9 about the issues involved in elections and about public policies more generally. This fact has two possible implications. First, recognizing the likelihood of such ignorance on the part of the electorate, the constitutional decision maker may prefer a set of institutions in which effective political power is more narrowly held than under genuine majority rule. Rather than choose to constrain politicians to behave in accordance with grossly underinformed electoral preferences, he may prefer to assign discretionary power to a smaller number of (representative) politicians-bureaucrats over some range and to depend on nonelectoral constraints to ensure that this power is used in the interests of the electorate.10 Second, the necessary asymmetry between information held by the electorate as distinct from the politician-bureaucrat offers scope for misleading the electorate, and a differential power which can within limits be exercised by politicians-bureaucrats in whatever way they choose.
Theoretical analysis of majority rule and its inadequacy to constrain. Each of the foregoing arguments was designed to illustrate the possibility that individuals might, at the constitutional level, explicitly choose nonelectoral means of constraining government in preference to relying on electoral processes, given that those electoral processes generate outcomes in line with electoral preferences. There is, however, no guarantee that majoritarian democracy will operate in this way. Even where electoral processes are intended to constrain the exercise of government power, will they necessarily do so? How do majoritarian political processes actually work? Do they in fact constrain the behavior of those who hold the power of government, and if so, to what extent? There are at least two matters here that merit discussion: one relates to the way in which it has become customary to model majority rule, the other to the role of bureaucracy in determining political outcomes.
1.The operation of majority rule. As is well known, unless preferences are single-peaked11 or parties have to announce policies simultaneously,12 majority rule generates cyclical “social preferences.” In other words, there are at least three positions, A, B, and C, such that a majority exists that prefers position A to position B, a majority exists that prefers B to C, and a majority exists that prefers C to A. Much of public-choice theory has indeed been preoccupied with this simple majority cycle. For example, in the simplest of the Downsian two-party models, one party, party I, has to announce its policy before the other, party II, and the announced platforms are binding.13 Downs shows that party II will always defeat party I. Suppose that we consider a simple three-voter world, with no utility interdependence, and party I announces a payoff to the three voters, a,b, and c, of $100 each. This platform can then be depicted as the payoff vector (100, 100, 100), where the first term indicates the payoff to a, the second term the payoff to b, and the third term the payoff to c. Party II can then announce a policy involving the payoff vector (101, 101, m), where m is less than 98 (or any permutation of these payoffs) and win the election. This possibility leads Downs to the conclusion that interparty competition does not in general lead to Pareto optimality, except perhaps by accident: a party can always ensure victory by announcing its policies last and by organizing appropriate transfers from some minority to the corresponding majority.
One important feature of this model, however, is an implicit inconsistency in the behavior of politicians. Politicians are postulated to maximize their expected returns, which depend on their election—and hence are modeled as maximizing the probability of being elected. It is therefore somewhat bizarre that they are not postulated to maximize the advantages of election when they are successful. Since party II knows that it can win the election if it has the right to announce its policy platform after party I, then II will respond to party I’s platform involving payoff vector (100, 100, 100) with a platform that both assures II of being elected and maximizes the “surplus” that it has at its disposal. In this case, party II’s “best” policy is one involving the payoff vector (101, 101, 0) (or any permutation of these payoffs), with the party itself appropriating the excess of total product over that product which is required to be left in the hands of voters in order to secure election. The implications of this simple model are then twofold: first, the rational party will exploit the maximal minority to the maximal extent feasible; and second, it will expend in payments to the majority the minimal sum necessary to secure election. As a result, a significant proportion of total resources is available for discretionary use by the successful party. In the non-single-peaked case, therefore, with sequential announcement of policy platforms, important dimensions of “monopoly government” emerge out of simple majority rule.
A number of questions might be posed about the foregoing model. One that arises out of the original Downsian discussion is whether the problems of majority rule in this setting might be avoided by requiring parties to announce their policies simultaneously. In the setting in which parties seek to maximize the probability of election, it does seem as if simultaneous announcement would serve to constrain parties fully. If, for example, we retain the three-voter case in which aggregate income is $300 and in which income can be costlessly transferred among voters, it seems clear that each party will aim for a platform in which two of the three voters share the $300 between themselves and the third receives nothing (the precise identity of the majority being determined at random). A party choosing this strategy would certainly expect to defeat one that chooses to distribute the $300 randomly among the three voters. What is significant in this particular case, however, is that if the party chooses to retain some of the $300 for its own use, the probability of being elected does not fall to zero. If we postulate that parties aim to maximize the expected returns from election, R, then
Beyond this, of course, one can hardly rule out the possibility of explicitly cooperative behavior. Politicians of all persuasions do have interests in common, and the potential for them to exploit these interests at the expense of the electorate is very considerable. As standard duopoly theory suggests, increasing the number of “firms” from one to two is not usually sufficient to ensure results analogous to pure competition: the costs of cooperation in the two-party case are surely too low to rule out collusive behavior.
It seems, therefore, that the prevailing views of majoritarian processes and electoral competition under majoritarian rule may be unduly sanguine about the capacity of electoral rules to constrain the exercise of political power. The reasons for this may be largely analytical—theorists have perhaps been overly preoccupied with the equilibrium properties of various electoral arrangements, while ignoring the role of the politicians as players in the political game. As a result, politicians have been mere cardboard cutouts, and the notion of constraining their behavior has been of less real interest than the puzzling conundrums of voting theory. To be sure, public choice has not been particularly optimistic about the possibility of the political mechanism generating outcomes with desirable welfare properties: majority rule has been recognized to generate outcomes that may be nonoptimal or inefficient by ordinary Paretian standards. This notwithstanding, it is clear that we may not have been pessimistic enough.
2.The role of the bureaucracy. Just as politicians have the power, through selection of policy platforms, to secure results distinct from those desired by the electorate (or even, as we have seen, those desired by the decisive majority), so do bureaucrats exercise genuinely discretionary power in the selection and implementation of policy proposals. Moreover, whereas the actions of politicians may be somewhat constrained by the threat of electoral defeat, the actions of bureaucrats are not.16 Indeed, by their very nature, bureaucrats act as monopolistic suppliers. Whether their role is to supply politicians with information about alternative policies, or to design the specifics of policies to be implemented—by appeal to their special skills and information—or to implement the policies (i.e., directly produce public goods) themselves, they do so in a setting in which competitive provision of such expert advice, or alternative sources of supply of the relevant public goods, are unavailable.
One could, of course, imagine a setting in which politicians contracted out the provision of public goods to the lowest-cost provider under a system of competitive tenders. Such a setting does, in fact, apply in some cases—for example, in highway construction or public works. Tasks might be contracted out to firms which do not work solely or even predominantly for the government, and which certainly have no right of tenure in public employment. But such a setting is the exception rather than the rule. Most of the human resources that are used up by governments are in permanent employ by government and do have right of tenure. They are in an inherently monopolistic position in the provision of public goods and services.
The precise way in which this monopoly power is exercised may, of course, vary. In one version of the theory of bureaucracy,17 bureaucrats are modeled as seeking to maximize the size of their budgets—a model that has some analytic features in common with those used in the book and developed subsequently in this chapter. In others, direct income maximization is taken to be the motivating force behind bureaucratic behavior. For our purposes, it hardly matters. What does matter is that the power that bureaucrats possess by virtue of their position as monopoly suppliers of public goods and services and of their role as “agenda setters” in the political arena18 is to be viewed as lying predominantly outside the coverage of electoral constraints: the potential for nonelectoral constraints to “improve” outcomes in line with the expected desires of the typical citizen-taxpayer at the constitutional level is considerable.
The broad brush of history. All of the foregoing analytics would be hardly to the point if there were clear empirical evidence to the effect that electoral processes have in practice worked pretty well in reflecting citizen preferences. But the facts, to the extent that they can be determined, hardly seem to support such a conclusion. On the contrary, the basic story seems to be an unambiguously sorry one for majoritarian political institutions. Over the last century or so, government has grown enormously in almost every country for which information is available, and probably to a magnitude completely unimagined by the Founding Fathers of the United States or any others of that period in history. In order to give a feeling for rough orders of magnitude, in 1902 the United States expended 7 percent of GNP on government activities at all levels—by 1970, the proportion was well over 30 percent. Of course, the precise interpretation of these figures is fraught with hazards. To the extent that the relative cost of publicly supplied goods has been rising, the increases in expenditure shares may reflect this cost increase alone. On the other hand, to the extent that much public-sector output is of the nature of Samuelsonian public goods, where total output is consumed equally by all consumers (or, less restrictively, where there are economies of scale in consumption), the expenditure share figures might disguise a larger share of public output in total output, due to the growth in GNP alone. Nor does the growth of government per se imply that government is too large: there is no presumption that government was the “right size” in 1902, or that increases in size do not accurately reflect electoral wishes. Moreover, it needs to be emphasized that the dimensions of our argument are essentially static. Even if it could be shown that electoral constraints had failed, our argument could not in itself explain the high growth of government, because to do so it would need to explain why electoral constraints have become less constraining over time.
However, as the size of government increases (for whatever reason) the question of whether standard electoral constraints are adequate to keep government power within acceptable bounds does naturally arise. Could the trend be reversed even if the citizenry wanted to reverse it? And if so, what means would be required?
It is in the light of these questions that another important facet of recent history suggests itself for consideration. This is the so-called “taxpayers’ revolt” which attracted widespread attention in 1978 in the wake of California’s Proposition 13. Regardless of the long-term significance or insignificance of this movement, several aspects of it are noteworthy for our purposes. First, the revolt emerged not from within normal “parliamentary” process and interparty competition but from outside this sytem. The enormous success of Proposition 13 in California in the face of indifference and even opposition from most of the political establishment must surely raise some doubts about the extent to which normal political processes reflect the popular will. And these are doubts that are not entirely allayed by the spectacular policy reversals of a considerable number of the movement’s original antagonists. Second, the revolt took the form not of once-and-for-all tax and expenditure cuts but of explicit constitutional constraints designed to be operative over an indefinite future. The avowed intention was to constrain the size of government below the level that would prevail under normal electoral processes. The obvious implication is that a significant body of citizens—and the overwhelming majority in some places—do not trust the in-period political process to produce results in accord with the electoral will, for whatever reason.
On balance, the appeal to the experience of history, and not least to recent events in the United States, does suggest that government, in its current institutional setting, is close to being out of the control of the electorate. Governments today seem to be substantially closer to the revenue-maximizing margins of behavior than they were in preceding decades and centuries. From this we might infer that a specifically designated and more explicitly restrictive tax constitution may now be appropriate, whereas it was not in prior periods. Whereas little or no attention might have been given to such matters in the nineteenth and early years of the twentieth century, a relative neglect that may well have been more or less rational, the forces of history may now have moved such problems into places of importance and relevance. With reference to the United States in particular, the absence of a more complete set of tax rules in the initial constitutional document may be at least partially rationalized in this fashion. The writers of that document simply could not bring themselves to imagine governments with the authority and appetites that the modern Leviathan is observed to possess.
The various arguments that we have put together in the foregoing discussion represent, we believe, sufficient grounds for taking seriously the role of nonelectoral constraints in the analysis of constitutional choice. The line of reasoning makes a persuasive case, we think, for a general model of the political mechanism in which majoritarian electoral processes are not effective in constraining the power of government.
We should emphasize, however, that the model of government which we set out in the next section and on which our analysis is based is not offered primarily as a description of political reality. Our basic aim is not to effect a revolution in the study of public choice—to overturn the newly emerged orthodoxy about how majoritarian democracies actually work. Even if such a revolution were feasible and desirable, it could only represent a digression from our main argument here. We do believe that there is explanatory potential in our model, and in other settings we should not be averse to exploiting that. Our point here is simply that we do not need this stronger positive or empirical case to establish that the model is both interesting and directly relevant to the issues of constitutional choice.
The Model of “Leviathan”: Revenue Maximization
Given that government, as it is observed to operate in-period, is taken to be effectively unconstrained by electoral considerations, the question arises as to how such government is to be modeled. What model of government behavior is to be used as the basis for deriving rules that make up a “good” tax constitution? This question is not as easy to answer as it may seem. In a very general sense, the model incorporates the presumption that governmental decision makers maximize their own utilities subject to the constraints that they face, including those that may or may not be imposed by means of the constitution. To make this presumption operationally meaningful, however, we need to define the relevant arguments in the utility functions, or at least to define the surrogates for such arguments.
The simplest version of the model presumes that governments maximize revenues from whatever sources of taxation are made available to them constitutionally. If there are no constraints on the uses to which revenues may be put, revenue becomes equivalent to private income to the governmental decision makers. If such constraints are operative but are independent of the tax rules which form the object of our study, we might also model government as attempting to maximize revenue, because revenue becomes a proxy for “surplus.”
If, for example, constraints on the use of revenue require effectively that some proportion, a, of total revenues be spent on specified public goods and services, then government “surplus,” S, the income that accrues to government for discretionary use, is the excess of revenue collections over spending on specified uses, G:
The expenditures of government are not, of course, restricted to the financing of genuinely public goods and services; and there are also serious questions that may be raised concerning the very existence of such goods and services, at least in the form implied by the polar Samuelson definition. Yet once we move outside the pure polar case, the possibility of governments using revenue to redistribute in their own direction because of purely private dimensions to goods publicly supplied implies that incentives to expand budget size are more striking still; and the satiety limits are further expanded because of the possibility of retrading private benefits. Revenue maximization remains a suitable simplification of government behavior.
We may now consider a setting that may seem more descriptive of real-world budgetary experience, one where government finances public and quasi-public goods and services, which presumably yield some benefits to large numbers of the members of the political community, but also finances direct monetary transfers. Suppose, however, that there are constitutional constraints on the direction of transfer flows. Direct monetary payments from tax revenues are constrained to flow toward those members of the community who somehow qualify on criteria of poverty. This constraint implies that governmental decision makers are not allowed to transfer tax revenues directly to themselves. Such revenues are not, therefore, equivalent to private incomes as they are in the nonconstrained transfer setting. Utility maximization on the part of the governmental decision makers here will tend toward the minimization rather than the maximization of the direct payments to the poor. However, in the guise of assistance to the poor, governmental decision makers may secure indirect transfers via the “welfare bureaucracy.” Indeed, such a bureaucracy is the predicted result of utility-maximizing government here; direct payments to the poor are not. In this setting, as in the other ones discussed, utility maximization on the part of those who make governmental decisions will predictably embody revenue maximization.
There is, however, one situation in which revenue maximization and surplus maximization diverge. This is where the a of Equation (2) is dependent on the level of revenue, or spending. We examine one particularly interesting variant of this case in Chapter 7. And in the federalism setting discussed in Chapter 9, no constraints on the use of public funds are required. But in the analysis of Chapters 3 through 6, the revenue-maximization model is employed as the most logical and least complex expression of the objectives of Leviathan government.
The Model of Leviathan as Monolith
In incorporating revenue maximization as the central feature or characteristic of government behavior, we are, as previously noted, making a heroic leap from individual utility maximization to the presumption of a single maximand for “government” which is in almost all circumstances best modeled as a collectivity. Even in nondemocratic states, it is rare that “government” can descriptively be modeled as a single unit, analogous to a single person. If we allow for the interaction of many, several, or even a few separate utility-maximizing individuals within the set of those who effectively make governmental decisions, we are thrown directly into the complexities of public-choice-social-choice theory. “Government,” as such, cannot exist, and “governmental outcomes” may exhibit relatively little internal consistency or stability.
We do not, of course, deny the relevance and the importance of the various attempts to look at the political process from within the public-choice-social-choice framework or paradigm. (This statement should be obvious to those familiar with some of our own previous efforts.) But we have chosen, quite deliberately here, to cut through some of these complexities of interpersonal interactions that take place within the set of governmental decision makers and to impose the “as if” model of “government as an entity.” In so doing, we are not implying that “government” is something that does, in fact, exist separate and apart from and somehow independent of those persons who act on its behalf, who are individually responsible for the particular results to be observed. These persons are presumed to be maximizing their own utilities, and we are not claiming that each politician-bureaucrat or even any politician-bureaucrat accepts revenue maximization as an explicit objective. Quite the contrary. It seems unlikely that any governmental decision maker will embody such an explicit revenue objective in his utility function, at least directly. Our logical construction is not inconsistent with the utility-maximizing models of the politicians and bureaucrats that are to be found in the modern public-choice literature. The decision makers, individually, in our model do not try to further “Leviathan’s interest” directly, any more than they try to further the more familiar “public interest.”
The analogy with the interaction of separate buyers and sellers in the competitive market may be helpful. Since Adam Smith, we have known that something that might be called the general “public interest” is promoted by the operation of competitive markets, even though no single participant need explicitly try to promote such an objective. Our model of governmental operation is based on the presumption that something close to “Leviathan’s interest,” revenue maximization, emerges from the interaction of the whole set of governmental decision makers even if no person explicitly sets maximum revenue as the goal of his own action.
We construct our model of the revenue-maximizing Leviathan in an attempt to bring the observed results of modern governmental decision structures into an analytical pattern that will allow us to initiate reasonable discussion of constitutional alternatives. As we have previously noted, analyses of the complexity of the interactions among individuals in producing collective outcomes may lead to the normative evaluation of constitutional alternatives described in terms of voting rules, procedures, and processes. And it is surely within the realm of the possible that some subset of such alternatives may produce predicted fiscal results such as to make any model of the revenue-maximizing Leviathan wholly inappropriate. But we do not propose to discuss these aspects of the more inclusive constitutional challenges confronted in modern societies. We present our model of the revenue-maximizing Leviathan as a reasonable setting within which the alternative elements of a tax constitution might be discussed: nothing more, nothing less.
There are two steps involved in a shift from the benevolent despotism model of politics to that of revenue-maximizing Leviathan, and many critics may be prepared to go halfway but no further. These critics recognize that persons who act in public-choice roles can best be analyzed as utility maximizers, but they may object to the methodological “leap to Leviathan.” These critics may propose that “government” behavior can best be modeled as some sort of “unconstrained random walk” over the potential policy space, without a meaningful maximand, even for “as if” analysis. We should acknowledge the inherent plausibility of such a model of political process, and we can appreciate the challenge of trying to derive the foundations of an appropriate fiscal constitution in such a setting. In many respects, such a constitution would probably be quite similar to that which might emerge under Leviathan assumptions; in other respects, differences might appear. The point of emphasis, however, is that the desirability of constitutional limits is in no way reduced by a switch to such a model of politics. In at least partial defense of the Leviathan model by comparison with a “random walk” model, we might point to the empirical record of governmental growth, in both a relative and an absolute sense.
The Constitutional Criteria
Before we proceed to the analysis of constitutional choice among alternative tax institutions in the setting provided by our somewhat unconventional model of political processes, we need to offer some remarks on the “welfare characteristics” of this model. More specifically, we need to ask whether we can be sure that constraints designed to limit the behavior of naturally monopolistic government, as modeled here, would in fact emerge from constitutional contract. Is it inconceivable that the future citizen-taxpayer might prefer to leave the taxing power unconstrained even if government is modeled as a revenue-maximizing Leviathan?
At one level, such a question might seem absurd. Surely, the potential citizen-taxpayer would desire fiscal outcomes closer to those he expects to want over the sequence of budgetary periods. But once it is recognized that the citizen-taxpayer may himself be a member of the ruling class—a politician-bureaucrat in future periods—then the answer ceases to be self-evident.
Consider two simple examples. If Leviathan is conceived as a monopoly supplier of public goods which, by “perfect” discriminatory tax pricing, can appropriate the full benefits from public-goods provision (which in the limit are the entire benefits accruing from the leap out of anarchy), then the benefits from public-goods provision are internal to the community provided that the monopoly supplier is expected to be a member of the community. Although postconstitutionally each citizen-taxpayer is virtually no better off than he would be in anarchy, the public-goods suppliers are very much better off. If, in fact, the one’s loss is the other’s gain, and the citizen-taxpayer, who is not a member of the ruling group, is indifferent as to the distribution of the net benefits from public-goods provision, then unconstrained Leviathan government could indeed emerge from a constitutional calculus. From behind a genuine veil of ignorance, the gain to potential politicians-bureaucrats exactly offsets the loss to potential citizens-taxpayers in each individual’s calculations. Constraints designed to secure a greater share of benefits for the latter group would not offer any expected benefits at all.
A similar conclusion might be reached from our discussion of the operation of majority rule in Section 2.2. In the standard Downsian model of democracy, where preferences are non-single-peaked and policy announcement by parties is sequential, “political failure” results because the party that has the right to announce its policies last can win whether it chooses an optimal point or not. This phenomenon Downs refers to as “positive blocking.” If political parties are conceived as within the relevant total group, and if those parties are surplus maximizers as in our alternative to the Downs model, then a Pareto optimum will always be aimed at, because the winning party will not allow unnecessary waste which it can convert into personal surplus. To the extent that the citizen at the constitutional level is interested solely in expected returns, therefore, it seems that exploitation of citizens by the government would be quite acceptable to him; aggregate expected returns, including the payoff to parties, are actually higher if parties maximize surplus than if they are simply motivated in the Downsian fashion to secure election.
The implications of posing this problem are of course very broad indeed. To the extent that electoral processes are seen as imposing constraints on government, what is at stake is nothing less than the issue of why genuine democracy—where it works perfectly, and setting aside problems of rational ignorance and the like—is to be preferred to dictatorship. And one might well assert that, if the two are equally acceptable within the constitutional setting, then so much the worse for the constitutional approach.
Our response might be that consideration of these issues would divert us from our main purpose—that we can simply take it as given that the role of electoral processes is to constrain naturally monopolistic government and examine nonelectoral rules from the same perspective and according to the same criteria. Our whole argument would, however, remain vulnerable to the charge that the analytic setting we have chosen indicates no underlying rationale for the existence of constraints on government of any form, and that consequently there can be no normative justification for our version of the fiscal constitution at all.
As a result, although we do not seek here to explore “the case for democracy” even in the most general terms, we do need arguments to suggest that Leviathan unconstrained is not an “efficient institution” in our sense (i.e., that it would not emerge from the constitutional contract unless constraints are inordinately costly). We may offer three basic arguments in this connection.
First, individuals in the constitutional setting may not be indifferent as to the distribution of benefits. To the extent that they are risk averse, they could be presumed strongly to favor constrained government and to oppose the narrow distribution of enormous gains that pure monopoly government would imply. This argument is, we feel, quite persuasive enough on its own. However, we do not seek to rely solely on Rawls-like distributional arguments either to justify fiscal constraints or to specify the form those constraints should take. The fiscal constitution we explore here is not essentially Rawlsian in its normative embodiments.19
Second, to the extent that taxes impose an excess burden over and above the revenue released to government, transfers from citizens-taxpayers to politician-bureaucrats will not be costless. Setting distributional issues aside therefore and anticipating that each individual will make his constitutional choice solely in terms of expected returns, the constitutional calculus would generate an institutional setting in which pure transfers from citizens to government were minimized (i.e., transfers of resources over and above those required for public-goods provision). In other words, citizens would aim to constrain Leviathan to the maximum possible extent. Since, in fact, virtually all feasible tax arrangements do involve “excess burdens,” this seems to be a decisive argument for the imposition of constraints generally and of fiscal constraints in particular.20
Third, an element of efficiency cost that has recently emerged under the rubric “rent seeking” seems to be of particular relevance.21 The existence of profits to be obtained from occupying positions of power in government generates competitive processes to obtain those profits—processes which themselves involve the use of economic resources. The establishment of a completely unconstrained Leviathan under a voluntary constitution would involve the creation of a monopoly franchise of enormous proportions: it would be an example of the creation of potential rents par excellence. Just as the competition for a monopoly franchise in the conventional setting involves the creation of incentives to expend resources to obtain that franchise (conceivably many times larger in value than the value of the monopoly rent involved), so the establishment of powerful monopoly government would create incentives to fight over who will occupy the seat of power. History—military history in particular—is replete with examples. History is also eloquent on the magnitude of the costs. From his disembodied vantage point behind the veil of ignorance, the typical citizen would surely prefer to minimize the expenditure of resources in this utterly wasteful manner. The only way of doing so is, however, to minimize the rents that accrue from “governing”—that is, by constraining Leviathan so that its surplus is minimal.
These arguments seem to us to constitute a persuasive case for predicting that all rational individuals, behind a veil of ignorance, would seek to constrain exploitation by revenue-maximizing government to the maximum possible extent. Our construction is based on this hypothesis. To the extent that individuals model government in other than revenue-maximizing terms, our analysis is broadly suggestive rather than definitive. As long, however, as there is predicted to be some feedback effect between the availability of revenue sources and the amount of revenue raised, the substantive implications of our analysis remain valid.
[1. ] The monopoly-state models developed by several Italian public-finance theorists have some common features with our construction. These models were presented alternatives to the democratic-state models by both de Viti de Marco and Fasiani. For a general discussion of the Italian contributions, with appropriate citations of the relevant Italian works, see James M. Buchanan, “La scienza delle finanze: The Italian Tradition in Fiscal Theory,” in Fiscal Theory and Political Economy (Chapel Hill: University of North Carolina Press, 1960), pp. 24-74.
[2. ] Dennis H. Robertson, Economic Commentaries (London: Staples Press, 1956), pp. 148-49, 154.
[3. ] See James C. Miller III, “A Program for Direct and Proxy Voting in the Legislative Process,” Public Choice, 7 (Fall 1969), 107-13.
[4. ] See the discussion of the “punishment dilemma,” in Buchanan’s The Limits of Liberty (Chicago: University of Chicago Press, 1975), chap. 8, and the discussion in Buchanan’s paper, “The Samaritan’s Dilemma,” in Altruism, Morality and Economic Theory, ed. E. S. Phelps (New York: Russell Sage Foundation, 1975), pp. 71-85.
[5. ] In a constitutional choice, the desired level of welfare payments will be that level which maximizes the expression: whereas period-by-period decision making will produce the result where Bi is aggregate dollar benefit in period i and Ci is aggregate dollar cost in period i.
[6. ] For an attempt to model this problem for the individual formally, see A. M. Shefrin and Richard Thaler, “An Economic Theory of Self-control,” Working Paper No. 208, Center for Economic Analysis of Human Behavior and Social Institutions (Stanford, Calif.: National Bureau of Economic Research, October 1977).
[7. ] In a setting where individual sovereignty is accepted, the precise normative authority of constitutional as opposed to in-period preferences is by no means clear. One cannot say whether the one should take precedence over the other without appeal to additional value judgments. One can, however, at a purely positive level, observe that decisions about in-period outcomes may be taken at the constitutional level that would never emerge out of ordinary political process, whatever the electoral rules, because in-period preferences would not endorse them. By their nature, such constitutionally preferred policies (including potentially much of redistributional policy) must emerge independently of current electoral processes.
[8. ] Anthony Downs, An Economic Theory of Democracy (New York: Harper & Brothers, 1957), chaps. 11, 13.
[9. ] That is, they will possess less than Pareto-optimal levels of information.
[10. ] This is, in essence, the argument typically put in favor of governmental decision making, rather than decision making by means of continual referenda. The absence of continual referenda does, however, undoubtedly lead to greater discretionary power held by bureaucrats and politicians.
[11. ] To secure single peakedness in preferences, substantial restrictions on both the domain of public spending and the permanence of tax institutions would be required, restrictions that need not characterize the “fiscal constitution.”
[12. ] See Downs, An Economic Theory of Democracy, chap. 10.
[13. ] Ibid.
[14. ] Suppose, to take a simple case, that party I distributes $280 randomly between two voters (let them be A, B), the identity of whom is unknown to party II, and retains the remaining $20 for itself. To establish the proposition that choice of this strategy does not reduce to zero party I’s chances of winning, all we need to ask is whether party II can be certain of victory if it distributes the full $300 to the electorate. The answer is clearly no. If II distributes $150 to either B or C and nothing to A, I will win if he pays more than $150 to either B or C and the remainder to A. Party I’s offer could be (120, 160, 0), and II’s (0, 150, 150); and I would win the election. There is clearly a whole range of possible arrangements in which I defeats II, even though the sum of the payoffs to electors is smaller for party I.
[15. ] Downs, An Economic Theory of Democracy, chap. 10.
[16. ] Political appointees may populate the upper echelons of the bureaucracy (as they do in American institutions), in which case they may be constrained in much the same way as politicians are (or are not) by electoral proceedings, depending on their tenure. But in some parts of the bureaucracy (the military establishment, for example) and in all parts of the bureaucracy where the executive is officially apolitical (as in British institutions), bureaucrats are not at all subject to electoral constraints—whether those constraints are effective or not.
[17. ] William Niskanen, Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971).
[18. ] The importance of this role is emphasized and an interpretation of Niskanen’s theory along such lines offered in ongoing work by our colleagues Robert Mackay and Carolyn Weaver. See, for example, their “Monopoly Bureaus and Fiscal Outcomes: Deductive Models and Implications for Reform,” in Gordon Tullock and Richard E. Wagner, eds., Deductive Reasoning in the Analysis of Public Policy (Lexington, Mass.: Lexington Books, 1978); “Agenda Control by Budget Maximizers in a Multi-bureau Setting,” Public Choice (Summer 1981), forthcoming; “Commodity Bundling and Agenda Control in the Public Sector: A Mathematical Analysis,” Virginia Polytechnic Institute and State University Working Paper CE 79-6-1; and “On the Mutuality of Interests between Bureaus and High Demand Review Committees,” Public Choice, 34 (1979), 481-91. See also Arthur Denzau and Robert Mackay, “Benefit and Tax Share Discrimination by a Monopoly Bureau,” Journal of Public Economics (1980). For an analysis of constitutional limits as a control on the monopoly power of agenda setters, see Arthur Denzau, Robert Mackay, and Carolyn Weaver, “Spending Limitations, Agenda Control and Voters’ Expectations,” National Tax Journal, 32 (June 1979), 189-200; and “On the Initiative-Referendum Option and the Control of Monopoly Government,” Papers of the Committee on Urban Public Economics, 5, 1980.
[19. ] A Rawlsian fiscal constitution could be devised in which the rules that we develop would play a role. But this is not what we have attempted here. Such an effort would, however, represent a promising line of inquiry.
[20. ] Such reasoning does not, of course, rule out the possibility of redistribution entirely. Where altruistic attitudes prevail, or where for other reasons “donors” derive benefits from transfers that are not fully excludable, redistribution through the public sector may be thoroughly justified on efficiency grounds over some range. What the reasoning does rule out is the neutrality of transfers that are purely random in terms of the directions that citizens desire. In other words, transfers that are zero-sum when the redistributive process is costless are negative-sum in practice. The constitutional contract would naturally seek to minimize these negative-sum elements.
[21. ] See Gordon Tullock’s pathbreaking paper “The Welfare Costs of Tariffs, Monopolies, and Theft,” Western Economic Journal, 5 (June 1967), 224-32; also see Richard A. Posner, “The Social Cost of Monopoly and Regulation,” Journal of Political Economy, 83 (August 1975), 807-27, and Anne O. Krueger, “The Political Economy of the Rent-seeking Society,” American Economic Review, 64 (June 1974), 291-303. These basic papers, along with other contributions to the general theory of rent seeking, are collected in Toward a Theory of the Rent-Seeking Society, ed. James Buchanan, Robert D. Tollison, and Gordon Tullock (College Station: Texas A&M University Press, 1980).