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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

Appendix

The purpose of this appendix is to extend the analysis of Section 4.4 to a simplified general equilibrium approach somewhat more in keeping with the modern optimal-tax literature. Consider, for example, one of the simpler and more familiar discussions, that provided by Harberger.15 The tax rule derived by Harberger is designed for minimizing the welfare loss of a system of excises, given a revenue constraint, in a three-good setting in which one of the goods (leisure presumably) is tax-free. Let X₁, X₂, and X₃ be the three goods, following Harberger’s formulation, and suppose X₃ to be tax-free leisure. Then the change in X₁ and X₂ in response to taxes t₁ and t₂, respectively, is given by
     (1)
     (2)
where the units of X₁ and X₂ are chosen so that the initial prices are unity. Using the expression for the welfare loss as
     (3)
we obtain
     (4)
where

is the Hicksian substitution effect.

In the Harberger case, W is minimized with respect to t₁ and t₂, given a revenue constraint. Harberger does not allow for the effect of changes in the tax base on revenue, but this can be done without changing the nature of his solution. For we seek to minimize
     (5)
where
     (6)
This becomes
     (7)
The minimization exercise yields a set of equations
     (8)
     (9)
which solve to yield the optimal-tax structure,
     (10)
(Harberger manipulates this to get
     (11)
where η_ij is the elasticity of demand for the ith good with respect to the jth price.)

For our purposes, however, we note that R is given by

or
     (12)
So to maximize R with respect to t₁ and t₂ yields two equations:
     (13)
     (14)
which have the solution
     (15)
which is precisely identical to Harberger’s tax rule, (10) above.

We note further that the left-hand side of (13) is ΔX₁* from (1), and the left-hand side of (14) is ΔX₂* from (2). So we have
     (16)
     (17)
and multiplying (16) by t₁*, (17) by t₂*, and adding, we have

or
     (18)
from (3) and (6).

We can on this basis conclude that optimal-tax rules and maximum revenue rules are indeed identical, even in this simple general equilibrium setting; and further, that under maximum revenue assumptions, total revenue remains exactly twice the welfare loss, just as in the partial equilibrium case, even where discrimination between goods is permitted and general equilibrium effects allowed for.

5.

Taxation through Time

Income Taxes, Capital Taxes, and Public Debt

In the analyses of Chapters 3 and 4, the activities of a revenue-maximizing government were examined in highly simplified single-period settings. In this chapter, we shall modify this single-period aspect of the model in order to introduce several interrelated issues that involve a temporal dimension.

One of the issues that emerges directly concerns the taxation of capital or wealth. In any multiperiod setting, individuals may save (create capital) and dissave (consume capital) in order to allocate consumption appropriately over their anticipated life cycle. They may, of course, also save in order to transmit capital values to heirs. The accumulation and maintenance of capital offers a potential source of tax revenue. We need to examine the implications of making this source available to government, and in particular we must analyze the characteristics of the capital levy as opposed to the income tax in our Leviathan model.

A second issue that emerges concerns public debt. Governments, as well as individuals, may have the inclination to borrow, and they may or may not be assigned the capacity to do so. How do constitutional constraints on the government’s borrowing and lending powers complement—or more generally interact with—restrictions on the power to tax?

Questions about capital taxes and public debt must include consideration of more than just the size of the revenue source. In the single-period setting, and assuming the disposition of revenues, the a in the earlier models, to be exogenously fixed, the only criterion in the constitutional calculus is the level of public-goods supply that a particular tax base and/or rate structure is expected to generate. By assumption or analytical convention, the base-rate structure, once chosen, is presumed to generate the same level of revenue, and hence public-goods supply, in any period. In an explicit multiperiod setting, the additional problem of generating an appropriate time stream of public spending must be considered.

A third issue concerns the temporal characteristics of government itself. In a multiperiod setting we must allow for the possibility that governments themselves may change their identity and nature. In this connection, it is relevant to ask what happens if government assumes Leviathan characteristics only occasionally. How, for example, does this possibility influence the individual as he behaves toward the fisc within a succession of budgetary periods? How does the taxpayer adjust his plans in reaction to a threat of a revenue-maximizing Leviathan, even in the current absence of such a regime? And taking such predictions all into account, how does the shift from continuous to sporadic Leviathan—what we here term “probabilistic Leviathan”—influence the individual’s constitutional calculus? The inclusive set of constitutional rules or arrangements may well include constraints on government’s fiscal behavior that are not expected to be binding during “normal” periods, but which are designed to come into play only when governmental fiscal activity exceeds certain bounds. Such contingency rules become central in an analysis of a probabilistic Leviathan, and these rules may be viewed as offering protection against fiscal abuse rather than constraints on ordinary exercises of the taxing power. Restrictions on the government’s power to tax capital and to borrow may take on special significance as contingency rules, even when they would have no particular status under continuous Leviathan assumptions.

Our aim in this chapter is to examine these interrelated issues. Before we proceed, however, it may be useful once again to review the public-finance orthodoxy briefly, for the purpose of emphasizing the distinctions between this orthodoxy and our own approach in application to the issues noted. Following this review in Section 5.1, we examine income and capital taxes in the perpetual or continuous Leviathan setting of the preceding chapters.

[15. ] Harberger, “Taxation, Resource Allocation and Welfare,” sec. 4.3.