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

3.1.

Government as Revenue Maximizer Subject to Constitutional Tax Constraints

As Knut Wicksell noted, no persons would approve the imposition of taxes, either at a constitutional or a postconstitutional stage of decision, unless they anticipate securing some benefits from the goods and services that they expect government to finance with the tax revenues collected. Taxes are coercive instruments that allow governments to levy charges on persons without any corresponding expression of current willingness to pay. Furthermore, even in the most effective models of political democracy, the consent of only a majority of the members of a representative assembly is needed for tax legislation.

Perhaps at one period in history it may have seemed reasonable to rely on the operation of majority rule in legislatures to hold governmental fiscal activities in bounds. And, of course, majority-rule models remain in formal theories of collective decision making and in popular discussions of democracy. However, confronted with public sectors of modern scope and bureaucracies that demonstrably possess power quite apart from specifically legislated authority, the democratic-limits model of governmental fiscal restraint becomes increasingly naive. Some of the reasons for questioning the efficacy of electoral constraints were discussed in Chapter 2. A more acceptable model for rational constitutional choice would seem to be one in which the political-bureaucratic process, as it is predicted to operate postconstitutionally, involves the maximization of revenues within tax constraints that are imposed through the fiscal constitution.

Such a model of political process, one that may be termed a model of Leviathan, has been introduced in Chapter 2. The citizenry has no effective control over government, once established, beyond the constraints that are imposed constitutionally. It is assumed that such constraints are binding, but that postconstitutional or in-period fiscal decisions within these constraints are made entirely by the budget-maximizing or revenue-maximizing politicians-bureaucrats.4

Our stylized constitutional choice setting is characterized by the further and familiar assumption that each person has well-defined predictions about the aggregate level and the distribution of incomes and consumption patterns in all postconstitutional periods, but that he possesses no knowledge about his own future position within the distribution or about the characteristics of his own taste pattern.5 The general, nonindividualized knowledge is sufficient to allow the person to make some estimate, within broad limits, both of the “efficient” levels of budgetary outlay on public goods, and of the aggregate revenues that might be obtained under alternative tax arrangements. Since the individual remains ignorant concerning his own predicted income or tastes, he cannot identify a cost share for himself under any particular tax system. He cannot, therefore, predict whether, postconstitutionally, he might prefer a larger or a smaller public-goods quantity than that which he predicts would be “efficient” for the whole community. Hence, each individual, rationally, will prefer institutions that generate roughly the “efficient” quantity, , given an independent estimate of the costs of provision. The actual outlay on desired public goods and services is defined by
G = αR,     (1)
where a is the predicted proportion of tax revenue spent on actually providing goods and services desired and R is aggregate tax collections or revenues. Throughout the analysis of the model to be discussed in this chapter, the value for a will be taken to be exogenous, by which we mean that it is fixed by the operation of constraints other than those here analyzed.6 As we have indicated, a is such that
1 > α > 0.     (2)
Hence, the outlay on desired public goods and services is some direct function of total revenue raised, and the problem that the individual faces at the constitutional stage is to organize tax arrangements so that the revenue raised, when adjusted by a, will yield the quantity of public goods and services estimated to be “efficient” at the given estimated new costs—costs that will, of course, be dependent on the value of a.7 Thus, R will be chosen so that
αR = .     (3)
The characteristic assumption of the Leviathan model is that, in each postconstitutional budgetary period, government will attempt to maximize total revenue collections (and hence total spending) within the constitutionally appointed tax regime. That is, government will make
R = R*(b, r),     (4)
where R* is the maximum revenue that can be raised from the tax regime and is a function of b, the tax base, and r, the allowable rate structure to be imposed on this base. Formally, the problem facing the individual at the stage of constitutional choice is to select b and r so that
     (5)

[4. ] There are evident similarities between our model and that developed by William Niskanen in his theory of bureaucracy. See his Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971).

[5. ] In the most extreme setting for constitutional choice, we may assume that the individual is in some Rawlsian “original position” and behind the “veil of ignorance.” See John Rawls, A Theory of Justice (Cambridge: Harvard University Press, 1971). We do not need to impose such rigid requirements, however, for the constitutional setting to be relevant. Somewhat more plausibly, we may assume only that the individual is highly uncertain about his own future position. See James M. Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962).

[6. ] The use of tax constraints to ensure that the value of a will be high will be specifically analyzed in Chapter 7.

[7. ] The interrelationships among , a, and various aspects of tax institutions will be discussed in some detail in Chapter 4.