The Online Library of Liberty

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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

5.7.

Conclusions

The highly abstract and simplified analytical models introduced in Chapters 3 and 4 as well as in this chapter have been constructed to demonstrate the dramatic differences in the normative implications for taxation that emerge as between the orthodox model of the benevolent despot and our model of government as a revenue-maximizing Leviathan. The analysis in Chapters 3 and 4 was limited to a single-period or instantaneous model. Under the assumption that a designated proportion of all revenue collections is expended on public goods and services desired by citizens-taxpayers, the analysis demonstrated that Leviathan’s revenue-raising proclivities might be efficiently constrained by some appropriate selection of tax bases and tax rates. The analysis of this chapter has extended essentially the same model to a multiperiod sequence.

The distinction between the taxation of income or expenditure on the one hand and the taxation of capital (along with the issue of public debt) on the other becomes especially important in such an intertemporal fiscal structure. If a revenue-maximizing government, whether such an entity be envisaged permanently or only probabilistically, is predicted, the constitutional calculus of the potential taxpayer-beneficiary would probably incorporate severe restrictions on both capital levies and on public debt, except in times of dire fiscal emergencies as described by forces exogenous to the political process. To allow unrestricted access to either capital taxation or to public-debt issue ensures that a revenue-maximizing government may appropriate future revenue potential for current-period usage, a result that the potential taxpayer could hardly be expected to prefer.

The analysis does not necessarily suggest that the consumption tax will dominate the income tax in the rational constitutional calculus of the potential taxpayer. As we have noted, under some conditions, the consumption tax will tend to ensure a more even supply of public goods over time. Further, restriction of the tax base to consumption outlays will reduce the revenue potential of Leviathan, an objective that may in itself be desirable if the income tax is predicted to generate an overly large sum under revenue maximization. That is, saving becomes one possible nontaxable option that may be allowed to taxpayers. A by-product advantage of the consumption base, of course, lies in the additional saving, and additional economic growth, that is generated. Our analysis does not, however, bear directly on this aspect of fiscal choice.

As in the more simplified analysis of Chapters 3 and 4, the results here reinforce what appear to be widely held taxpayer attitudes concerning governmental fiscal powers. Capital levies are viewed with alarm by the ordinary citizen-taxpayer, and we observe debt limitation on the fiscal powers of many modern states. Our analysis here offers the theoretical basis for what may have often been interpreted to be such “gut” reactions to alternative fiscal arrangements.

An important conclusion that emerges directly from the analysis of this chapter concerns the effects of preannouncement of taxes. At the constitutional stage of decision, the potential taxpayer will prefer that governments be required to announce tax rates before the appropriate behavioral adjustments take place. This generalization of the legal precept against ex post facto legislation becomes especially significant under capital taxation, although it is by no means absent from income-tax considerations.

As regards public borrowing, the analysis tends to reinforce classical precepts that limit governmental resort to this revenue-raising instrument to periods of demonstrable fiscal emergency, when extraordinary expenses must somehow be financed. Even in such emergencies, however, constitutional restrictions against external as opposed to internal borrowing may remain in force. As the analysis has demonstrated, resort to external borrowing allows government to appropriate the full value of future revenues. Even if the citizen-taxpayer, at the constitutional stage of decision, projects only the possibility that a revenue-maximizing Leviathan may emerge, rational choice should dictate a preference for quite severe constraints on governmental power either to levy taxes on capital or to create public debt.

6.

Money Creation and Taxation

Money creation can be and frequently has been used by government as a device for raising revenue. In this chapter, we wish to examine money creation as a revenue instrument, broadly conceived, from within our constitutional perspective, and with our characteristically monopolistic assumptions about the behavior of government. In some ways, this involves a simple extension of the analysis of the taxation of wealth undertaken in Chapter 5. We have, in particular, consistently noted the analogy between assigning some tax base, X, to government and assigning to government a monopoly franchise in the provision of X. At one level, we could simply reverse the analogy and assert that assigning to government a monopoly franchise in the creation of money is equivalent to permitting government to levy a tax on money holdings. Since money holdings are a subset of aggregate wealth, the relevance of our earlier discussion of wealth taxation is clear.

There is, however, enough that is unusual about money creation to justify a somewhat more detailed discussion. The analysis of money issue in the context of our basic perspective on politics turns out to be both intrinsically interesting and potentially significant in an empirical sense. The peculiarities of inflation as a revenue device will emerge in the ensuing discussion. There is, however, one aspect of money creation that sets it apart from anything we have discussed so far and which merits mention at the outset.

Previously when we have discussed the power to tax as analogous to a corresponding monopoly franchise, we have done so on the assumption that the sole function of the arrangement is to raise revenue. There has been no implication that in the absence of the exercise of the taxing power, the competitive market structure could not or would not provide the tax-base goods in a tolerably efficient and acceptable manner. There is no plausible argument that the supply and provision of goods that might be potential tax bases need be socialized. With money creation the case is not so clear. Monetary theorists engage in a long and continuing debate over whether competition in the supply of monetary instruments would be reasonably efficient or even whether competitive organization is at all feasible. The justification for the government’s possession of a monopoly franchise in the creation of money normally found in the literature is not based primarily on the implications for revenue raising: the revenue implications emerge as an incidental feature, to the extent that they are treated explicitly at all.

We do not ourselves wish to take sides in the debate over the possible efficacy of a free market in money. What we do wish to point out are the revenue implications of assigning to government a monopoly franchise in money creation, implications that emerge emphatically in our Leviathan model of politics. Our analysis concentrates on predictions as to how such a monopoly franchise will be exploited. Even if the market provision of money should be grossly inefficient in the standard economic sense, the costs of the predicted government alternative are relevant in any constitutional choice between possible institutional settings. And even if the market alternative should be rejected after careful institutional comparison, predictions about likely outcomes when government is assigned the power to create money remain crucial in setting the terms of the constitutional restrictions that the rational citizen-taxpayer might desire to impose on government in the exercise of that power.

Our argument in this chapter is organized in several stages. In Section 6.1, we develop some simple propositions about the revenue significance of the power to create money. In Section 6.2, we turn to the discussion of inflation specifically. We do so by appeal to an analogy between money and a durable physical asset, “land.” Our aim in this section is to point up the crucial role of expectations in determining the revenue significance of inflation and the monopoly money franchise. In Section 6.3 we consider the question of inflation and money creation more directly, using the analogy of Section 6.2. Section 6.4 attempts to indicate the sorts of expectations of government action that the citizen-taxpayer might be expected to hold. In Section 6.5, we contrast the tax on money balances with other forms of wealth taxation, and in Section 6.6, we attempt to indicate where our discussion diverges from the orthodoxy, and why. Section 6.7 offers some comments about the timing of revenue streams under alternative monetary constitutions. The relation between inflation and income-tax revenues is considered briefly in Section 6.8. We conclude in Section 6.9 with a broad methodological comment on the connection between existing literature on the “monetary constitution” and our own exercise of establishing an analytical basis for a “fiscal constitution.”