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

4.5.

Uniformity of Rates over Individuals

It would in principle be possible for optimal-tax recommendations to extend to the discriminatory treatment of different individuals. The simple partial equilibrium diagrammatics in Figure 4.4 are applicable,11 as was indeed indicated by our usage of essentially the same construction in Chapter 3 in Figure 3.3. By reinterpreting D_a and D_b in Figure 4.4 as the demand curves of two individuals for some taxable commodity X, and D_ab as the aggregate demand over the “market” comprised of these two persons, we can derive the following results:

• 1. Consistent with the optimal-tax approach, any given level of revenue, R, could be obtained with a smaller welfare loss by the appropriately discriminatory pattern of taxes—a relatively higher rate of tax on individual B than on A.
• 2. Equally and for precisely the same reasons, the maximum revenue potential increases when this pattern of discrimination is used.
• 3. If the maximum revenue potential is fully exploited, the welfare loss is concomitantly higher when discrimination among individuals is allowed.

As in the income-tax setting, therefore, the restriction that there be no discrimination among individuals on the basis of different tastes—one aspect of traditional horizontal equity norms—can be understood and justified in this setting as one limit on the revenue capabilities of Leviathan government.

We suggested that such possibilities for discrimination in rates among separate taxpayers exist “in principle” and that, if exploited, such discrimination would produce the comparative results indicated. The analysis requires the qualification noted at this point, however, because of the difficulty that even a monolithic and monopolistic Leviathan might confront in bridging the gap between “principle” and “practice.” In this particular respect, the analysis applied to income taxation (Chapter 3) becomes significantly different from that applied to commodity taxation (Chapter 4). Individuals must earn income on their own; they cannot readily work out arrangements by which other persons earn income on their behalf. By contrast, individuals need not purchase commodities directly. They can consume commodities purchased for them by others. And any differentiation among persons in rates of commodity tax (and hence in purchase price) sets up strong incentives for such indirect “purchases” to be made. For ordinary commodities, especially those that are not consumed on the instant of purchase, differential tax rates among different persons may prove impossible to implement. In practice, the effective rate of commodity tax would tend to be the lowest rate imposed on any person in the community, with this person becoming the direct purchaser for everyone. Imposition of a tax on final consumption rather than purchase of commodities might allow for rate differentiation, but monitoring costs would likely become prohibitive, even for the monopoly government. In a sense, therefore, the analysis of rate differentiation here among persons is more of an intellectual exercise than a treatment of a relevant prospect. The exercise itself, however, has the advantage of extending the direct analogy between monopoly government and the monopoly firm in traditional price theory. The institutional barriers to effective discrimination are equivalent in the two cases.

[11. ] There is no interpersonal analogue to complementarity-substitutability relations between commodities.