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• 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

2.5.

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.

3.

Constraints on Base and Rate Structure*

As we have noted, traditional normative tax theory applies external criteria for economic efficiency and equity to evaluate alternative taxing arrangements. In the standard comparisons among alternatives, the problem is posed in equi-revenue terms. Government is presumed to require some exogenously determined amount of revenue per period, with the analysis having as its purpose the identification of that taxing arrangement that will generate such revenue most effectively as measured against the criteria chosen. In all essential respects, the standard analysis is institutionally vacuous. No attention is paid to possible feedback effects that specific tax instruments may exert on government itself in determining how much revenue it seeks to raise. By contrast, such possible interdependencies between the form of tax instruments and the behavior of governments in demanding revenues become central to any constitutional approach, including specifically one in which a Leviathan model of governmental process is adopted.1

To emphasize the dramatic difference that the change in assumptions about political process makes, it will be useful to summarize the “principles” for tax structure that emerge from the orthodox analysis. As noted, government is implicitly assumed to require a fixed amount of revenue per budgetary period, an amount that presumably will finance some efficient or optimal quantity of public goods and services, considered independent of the spending side of the account. In this framework, the ideally efficient tax is taken to be the lump-sum levy which, by definition, exerts no behavioral influence.2 Since persons do not adjust their behavior in any way in response to the tax, there can be no excess burden, no inefficiency that is tax-induced. Furthermore, within groups of taxpayers that are biologically homogeneous (with respect to features that cannot be modified by behavioral adjustment, features such as age, sex, race, and measured natural capacities and skills), the lump-sum tax must be uniform over separate persons. Hence, the central criterion of horizontal equity, equal treatment for equals, is satisfied along with that of economic efficiency.

The lump-sum tax serves as an analytical benchmark in the orthodox normative theory despite the widespread acknowledgment that it does not exist in practical reality. When it is recognized that all taxes must exert some behavioral influence, efficiency and equity criteria may come into conflict in the evaluation of alternative arrangements. On strict efficiency grounds, separate persons should be taxed in accordance with their separately predicted behavioral responses. Overall, excess burden is minimized only when the least responsive persons are taxed more heavily than are those who are more responsive. In such a case, however, equals, as measured by pretax situations, may not be treated equally, and equity considerations dictate uniformity of treatment regardless of behavioral response. Similarly, equity considerations may suggest relative differences in the tax treatment of “unequals” that run counter to the requirements for strict economic efficiency. If, for example, persons at lower ranges of the income or wealth scales should prove to be less responsive to tax than persons at the upper ranges, efficiency norms would suggest regressive rate schedules. Only such schedules would minimize excess burdens in this setting. However, equity norms might indicate that regressive rate schedules should be rejected out of hand and that persons should be confronted with rates that are at least proportional or possibly progressive in relation to pretax measures of tax base.

This orthodox normative evaluation of the characteristics of tax structures depends critically on the equi-revenue postulate, one that is untenable when we substitute a revenue-maximizing government for the passively benevolent politics implicitly assumed in the standard treatment. At the constitutional stage of decision in the Leviathan model, potential taxpayers will recognize that government may be held back in its fiscal appetites only by limits on tax bases and on allowable rate structures. Even the analytical benchmark, the idealized and abstract lump-sum tax, loses its “efficiency” features in constitutional perspective.3 If indeed a tax could be located that exerts no behavioral influence, and if a revenue-maximizing government should be granted access to such a source of funds, all persons would be totally vulnerable to the fiscal authority, with all potential economic value subject to overt confiscation in the taxing process.

As actual tax institutions rather than the idealized models are evaluated, the constitutionally derived efficiency ranking becomes quite different from that which emerges from the orthodox equi-revenue comparison. By contrast, the constitutional perspective tends to be consistent with and hence to reinforce the equity norms that emerge from the more limited, and more naive, orthodox discussion. The principle of horizontal equity, equal treatment for equals, or, put simply, uniformity of treatment for similarly situated persons, becomes a feature of any tax structure that can begin to constrain Leviathan’s exactions. If government is constitutionally required to follow precepts of generality in its fiscal dealings with citizens, the revenue potential that could possibly be derived from sophisticated discrimination among separate persons and groups of taxpayers is foreclosed.

Much the same conclusion arises with respect to rate schedules that confront the potential generators of tax base. If we make the plausible assumption that the potential taxpayer secures diminishing relative marginal utility from generating taxable base, whether this base be money income, money outlays, or specified items of spending or earnings, it follows that government can maximize revenue collections only by imposing an ideally regressive tax-rate schedule. Hence, a constitutional constraint against regressive schedules can serve to limit government’s taxing power, defined in gross revenue terms. Note that the requirement for uniformity or generality in tax treatment among persons as well as the possible requirement that rate schedules be nonregressive become possible characteristics of an efficient “tax constitution,” quite apart from any explicit introduction of external norms for tax equity or tax justice.

Over and beyond constitutional constraints on rate schedules, some limitations on the allowable bases for tax may be desired. In the orthodox normative theory, comprehensiveness in the actual bases of a tax is a highly ranked attribute of a fiscal structure. The logical support for such comprehensiveness is straightforward. To the extent that individuals, as potential taxpayers, are allowed to shift from taxable to nontaxable options, excess burden arises which represents deadweight loss to the community. Furthermore, to the extent that some potential taxpayers shift into nontaxable options while others do not, inequities seem to be created. Within an equi-revenue frame of reference, the argument for comprehensiveness in tax base is valid. But in the constitutional perspective taken in our analysis, the traditional support for tax-base comprehensiveness disappears.

Our purpose in this chapter is to examine in somewhat more formal terms the revenue-maximizing model of government and to analyze possible tax-base and tax-rate constraints that will serve to keep fiscal excesses within tolerable limits.

[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).

[* ] Some of the central ideas developed in this chapter were initially presented in a more general format in our paper “Towards a Tax Constitution for Leviathan,” Journal of Public Economics, 8 (December 1977), 255-74.

[1. ] Modern public-choice theory has incorporated the effects of tax instruments on public-goods supply in a constitutional choice approach. Almost exclusively, however, the public-choice model for constitutional fiscal choice has embodied the assumption, explicitly or implicitly, that postconstitutional budgetary decisions conform to the public-goods demands of the median voter or his representative in a legislative assembly. For this approach, see James M. Buchanan, Public Finance in Democratic Process (Chapel Hill: University of North Carolina Press, 1967). The analysis in this book differs critically from the public-choice theory analysis, in that we substitute a revenue-seeking Leviathan for the demand-driven and essentially passive government which that analysis assumes.

[2. ] If the spending side of the account is taken into account, the ideally efficient tax becomes the Lindahl tax price. In one sense, the element of coercive taxation is removed in this “fiscal-exchange” approach. The latter approach is, however, not properly classified as falling within the orthodox tax analysis summarized here. For a discussion of the fiscal-exchange approach, as it is contrasted with the orthodox, see James M. Buchanan, “Taxation in Fiscal Exchange,” Journal of Public Economics, 6 (July-August 1976), 17-29.

[3. ] In its most general meaning, “efficiency” must be related to conceptual agreements among all members of the community. At the level of standard policy discussion, it is relatively easy to translate the familiar Paretian criterion into such consensual terms, especially when the possibility of actually organizing a set of compensations is allowed. In constitutional choice, however, the consensual definition of efficiency (i.e., an efficient position or rule is one upon which no agreement for change can possibly be reached) does not readily map into familiar concepts in modern welfare economics. An “efficient” tax arrangement, one that would emerge from agreement at a constitutional state of deliberation, need not, and normally would not be expected to, satisfy orthodox criteria for efficiency defined at the in-period or postconstitutional level.