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

8.1.

Procedural Constraints on Political Decision Making

As we have noted earlier, our analysis departs from the conventional public-choice framework in which the government is modeled as a relatively passive responder to the demands placed upon it by voters-taxpayers-beneficiaries. We have argued in Chapter 2 that constitutional guarantees of electoral competition among politicians and parties are not sufficient to ensure that the Leviathan-like proclivities of governments are always kept in bounds. In that earlier discussion, we assumed a setting for electoral competition characterized by majority-voting rules both in elections among candidates for office and in choices among policy actions within legislative assemblies.

Once the inadequacies of electoral competition are acknowledged, there are two directions for reform. We might think of imposing constitutional constraints directly on the taxing-spending power, which is our basic subject matter in this book, or we might think of imposing constitutional changes in the procedures or rules through which political decisions are made. With some reforms of this latter type, resort to direct fiscal constraints may be neither necessary nor desirable.

By way of illustration, we can do no better than look to the seminal work of Knut Wicksell—work that has already been referred to several times in this book. Wicksell did not seek reform in the fiscal constitution, as such, but he did seek to achieve more responsive government through changes in the procedures through which taxing-spending decisions were made. In his idealized model, he proposed a rule of unanimity in legislatures. But he acknowledged the difficulties of such a rule in practice, and he seemed willing to settle for a qualified majority approval for all public outlay projects amounting to perhaps five-sixths of the total voting membership. Further, and at a more attainable level, Wicksell proposed that taxing and spending legislation be simultaneously considered. To Wicksell, legislatures should operate under an obligation to provide explicitly for the financing of each and every spending program authorized. In so doing, he recommended a form of earmarking somewhat similar to that indicated by the discussion in Chapter 7, but for rather different reasons. In the context of the modern discussion of constitutional policy, the proposal that government be required to balance its budget is perhaps a reasonably close analogue to the sort of procedural requirement that Wicksell suggested. We shall have more to say about “balanced-budget limitation” in Chapter 10; here, we simply note its status as a variety of “procedural constraint.”

The characteristic feature of procedural reform lies in its explicit avoidance of imposing constraints or limits on the results or outcomes of collective decision making. The proposals listed above, and others that might be discussed, operate directly on the process of reaching or making collective decisions; they do not restrict directly the particular range of outcomes that might be attained. This is not, of course, to deny that there must exist some feedback relationship between the predicted effects of procedural changes and the direction of predicted results. Indeed, some such predictions must be used to inform any choice among alternative procedures. But an advantage of purely procedural reform lies in the outcome flexibility that is retained.

In earlier chapters, we have found it to be convenient to model government as a monolithic entity that seeks to maximize net revenue or surplus. This model is useful in allowing us to discuss alternative tax constraints; the single maximand offers a device that allows predictions to be made about the behavior of an unconstrained Leviathan. It is clear that any discussion of procedural reform, as a possible substitute for fiscal constraints, must depart somewhat from such simplistic Leviathan construction. In the earlier analysis, the objective for constitutional change was one of limiting governmental behavior, of fencing government in, so to speak, without at the same time changing its “character.” The procedural changes suggested by Wicksell, however, are directed at modifying the structure of governing itself and, hence, changing the behavioral model appropriate to describe governmental actions. The surplus-maximizing objective would not be appropriately assigned to a government that operated within the Wicksellian procedural constraints. Such a government would not evoke the Leviathan metaphor, and the whole analysis and discussion of possible constitutional reform would be quite different from that presented in this book.

We have written this book about potential change in the fiscal constitution on the presumption that major changes in governmental procedures for reaching decisions do not occur, and that government, as we observe it to operate, will continue essentially as it is now institutionally characterized. As our other works should have indicated, the stance taken here does not suggest that we personally prefer the strictly fiscal constraints over the procedural ones. Both means of controlling governments must be analyzed and examined. Our efforts here reflect nothing more than a division of labor.