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

8.3.

The Domain of Public Expenditures

The ambiguity of the uniformity norm when applied only to the tax side of fiscal operations should not be taken to prejudice the question of its extension to the expenditure side. As it happens, requirements for Hayekian equality of treatment or generality have historically never been applied to the spending side: on the contrary, quite arbitrary discrimination in the distribution of the benefits of public spending among persons and groups seems to be characteristic of modern fiscal systems.2 But this fact of fiscal experience, in itself, offers no logical basis for rejecting legal requirements for uniformity on the spending side of the fiscal account as a possibility to be considered. But other types of constraint on the spending side deserve some attention here, and are historically more common. In this section, we seek to explore briefly some of these restrictions on expenditures, along with the implications of generality requirements.

If we imagine, in the foregoing example, that restrictions on generality were extended to the spending side of the account, it is clear that the potential for redistribution in the majority’s favor would be entirely removed: the requirement of an identical share in revenue for all would obliterate the possibility of any individual obtaining more than he paid in taxes. This would not, to be sure, hold in a slightly more general setting in which pretax incomes differ, provided that uniformity on the tax and expenditure sides is defined asymmetrically. For example, if proportional taxation is taken to satisfy the uniformity rubric on the tax side, but equal per capita shares are required on the expenditure side (a structure the so-called “linear negative income tax” simulates), some redistribution would still occur. There would clearly be less redistribution than where no uniformity restrictions were imposed on the transfer pattern, since richer majorities could never transfer income in their own direction; but where uniformity is defined symmetrically on both sides of the fiscal account, exploitation of a minority by a decisive majority is removed.

Somewhat similar restrictions on the power of an exploitative majority are achieved by the requirement that the spending activities of government be restricted to the provision of genuinely “public goods” of the pure Samuelsonian type. Such goods are by definition equally (and totally) consumed by all citizens; consequently, if there is uniformity on the tax side, the possibility of a majority redistributing resources in its own favor is substantially removed. It could indeed be argued that the restrictions on the domain of government activity which are extant in most written constitutions were drafted with such considerations in mind—they can certainly be rationalized along such lines.

In fact, the requirement that government spending be restricted to pure public goods is unnecessarily strict. The domain of government activity could be extended to those goods which are nonexcludable, even if jointness is incomplete: the crucial characteristic for these purposes is that each individual’s consumption—or access to consumption—be identical. Indeed, government could be allowed to finance and provide fully partitionable “private” goods and services embodying no jointness efficiencies at all provided that equal quantities be made available to all. In all such cases, the distributional consequences are essentially the same as when transfers are made to all on an equal-share basis. To the extent that uniformity on the tax side is interpreted to require anything other than equal absolute amounts of tax per taxpayer, possibilities of redistribution remain but are substantially restricted by the equal-share requirement on the expenditure side.

Two somewhat different and more general points should be made in relation to this discussion. First, we have interpreted the power to redistribute negatively, in the sense that such power offers Leviathan the opportunity to redistribute in its own direction. This interpretation is consistent with the basic thrust of our model of constitutional choice: in this model, there are no preferences for redistribution as such at the constitutional level, although of course some redistribution might emerge to the extent that taxpayers-donors wish to make transfers to recipients in-period.3 It is, however, clear that if the individual exhibits preferences over distributional matters at the constitutional level—whether they be Rawlsian, or otherwise—there is no guarantee that assigning the power to redistribute to government will be desirable: the transfer patterns that emerge from the assignment of such power may not at all satisfy any set of moral norms.

Second, restrictions on the domain of public spending of the sort we have been discussing may be implemented under an umbrella of rules against bureaucratic and political “corruption.” That such rules exist and that institutions for their enforcement exist under most constitutions can hardly be questioned. These rules clearly restrict the domain of public activity in one sense. Their significance lies in the inhibitions they place on the ability of those exercising discretionary power to appropriate resources directly. Neither such rules nor the restrictions on spending discussed earlier serve to prevent Leviathan’s appropriation of revenue surplus by indirect means—perquisites of office, overexpanded bureaucracies, and so on. For this reason, even if such restrictions could be expected to be totally effective—which seems unlikely—there would remain a role for tax limits of the type we have explored in preceding chapters.

[2. ] For a discussion of the legal-constitutional asymmetry in the treatment of taxes and benefits, see David A. Tuerck, “Constitutional Asymmetry,” Papers on Non-market Decision Making, 2 (1967), 27-44.

[3. ] See Harold Hochman and James Rodgers, “Pareto Optimal Redistribution,” American Economic Review, 59 (September 1969), 542-57, for a discussion of this possibility.