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

7.1.

The Model

Because the focus of analysis is somewhat different from that in preceding chapters, it will be useful to restate our basic model. The quantity of the public good (or public-goods bundle), G, provided by the monopoly government (Leviathan) is defined as
G = αR,     (1)
where, as before, R is total tax revenue collected and a is the share or proportion of that revenue devoted to outlay on the public good, G. In earlier chapters, we examined limits on R that might be exerted by appropriately chosen constitutional restrictions on tax bases and rate structures, with the value of a assumed to be exogenously fixed. In such a context, it was appropriate to assign a revenue-maximizing objective to Leviathan (or value-maximizing in the case of inflationary finance). This objective function for a Leviathan government was invariant as between a Niskanen-type bureaucracy model, in which the value of a is effectively unity, by virtue of constraints inherent in the political process,3 and a “pure surplus” model, in which the maximand is the excess of revenues collected over outlays on the public good. The fixity of a implies revenue maximizing as a rational course of action in either case. [In the “pure surplus” model, the maximand becomes (1 - a)R, which for given a, is maximized simultaneously with R.]

The restrictive effects of assuming a to be fixed should be clear. It is evident that the value of a may depend on the tax institutions selected, and it is this relationship that we address directly in this chapter. Let us suppose that we envisage the constitutional process as one that establishes a “monarchy,” under which a “king” may be treated as a utility maximizer in the standard manner. Both the monarchy and the king here are, of course, artifacts constructed solely for convenience in exposition. The king becomes a shorthand expression for the appropriately chosen collection of politicians and bureaucrats whose behavior generates outcomes in postconstitutional political settings, or even the decisive majority in a context of revolving coalitions where that majority exploits the minority. In any case, this collection acts “as if” it were a utility-maximizing entity, or king.

We ascribe to this behavioral unit the maximand, Y_k, where
Y_k = R − G,     (2)
Y_k = (1 − a)R.     (3)
Given (3), the king will aim to maximize R and to minimize a (i.e., to set a at zero) if R and a are unrelated. If, however, a can, in some way, be positively related to R, the maximization of Y_k may not involve the minimization of a. Recognition of this facet of the king’s maximization problem provides the setting for the potential taxpayer-beneficiary’s constitutional strategy in choosing tax instruments to assign to the king in the first place.

Before explaining this strategy in some depth, it is necessary to specify carefully the relationship of the king to other members of the political community. If the goods and services expected to be provided by government, G, are genuinely “public” in the nonexcludable sense, and, further, if the king shares in the benefits along with others, a may not be reduced to zero, even if its value remains wholly within the control of the king. That is, if the king’s utility function, U_k, contains an argument for G as well as for privately divisible goods that may be enjoyed exclusively, a strict maximizing calculus would imply some provision of G, and hence some value for a, assuming the absence of lumpiness. Largely for purposes of simplifying our discussion here, we shall initially assume that the king is wholly external to the other members of the community in the sense that he does not secure any positive benefits from the provision of G, even though the latter may be described as a collective-consumption good for all other persons. A somewhat more complex model which allows the king to be among the sharers of public-goods benefits and/or which allows for G as a direct argument in the king’s own utility function is presented in Section 7.4. In Sections 7.2 and 7.3, we shall assume that the king does not benefit from public-goods supply and that the surplus that accrues to the king is pure loss to the society. Both assumptions can be considerably weakened without the central results being lost—but initially it is convenient to deal with the more extreme case.

[3. ] In a Niskanen model, Leviathan achieves its surrogate equivalent of “surplus” by producing excessive quantities of G. See William Niskanen, Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971). The model has been subjected to criticism precisely because it fails to allow for any diversion of revenues away from the financing of genuine public goods. See Jean Luc Migué and Gérard Bélanger, “Toward a General Theory of Managerial Discretion,” Public Choice, 17 (Spring 1974), 27-42.