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

9.1.

Toward a Tax Constitution for Leviathan in an Open Economy with Trade but without Migration

The analysis of this section is obviously related to that which has been developed by international and public-finance economists under the rubrics of “optimal tariffs” and “tax exportation.” As before, however, the difference between our discussion and that of the orthodox literature lies in our concentration on the constitutional calculus of the potential taxpayer under Leviathan-like assumptions about the workings of the political process. A Leviathan government, interested solely in maximizing net revenue surplus for its own purposes, need not make any significant distinction between citizens and foreigners. This distinction is, however, quite crucial to the potential taxpayer, in his determination of the range and extent of taxing powers granted to government. The reason is straightforward: to the extent that government can be assigned taxing powers that impose costs on foreigners rather than on citizens, resources both for the provision of public goods and for the generation of Leviathan’s net surplus are not drawn directly from the private incomes of citizens.

Recall our simple algebraic formulation, in which Leviathan’s maximand, S, is determined by the difference between revenues, R, and G, the amount that it must spend on providing public goods:
S = R − G.     (1)
If, as we previously postulated, government must spend a fixed share, α, on G, we get
S = (1 − α)R.     (2)
If R can be increased without any increase in domestic taxation, it follows that G can be increased without cost, no matter how small the value of α may be. Of course, it remains true that the citizen-taxpayer would prefer α to be as large as possible and will take appropriate constitutional steps to increase its value whenever possible. But for a given α, the citizen-taxpayer will rationally attempt to raise maximal taxes from foreigners.

The potentiality for shifting the burden of taxes from citizens to foreigners depends on the degree to which domestic demand and supply may be separated from foreign demand and supply and upon the relative elasticities of the relevant demand and supply functions. In considering possible tax bases that might be assigned to government, the individual would favor those for which foreign demand looms large relative to domestic demand, and for which domestic supply is relatively elastic. Hotel rooms in Bermuda offer an example. At a constitutional level, the Bermuda government might be assigned the authority to levy taxes on hotel rooms with the assurance that only a relatively small part of the cost will fall on Bermuda citizens. In such a case, there need be little or no concern about the size of the aggregate revenue potential in relation to some globally efficient level of public goods and services. At essentially zero cost, the ideally desired level of public goods provision for local citizens may be very high indeed.

The domestic supply elasticity of the possible tax bases is, however, of critical importance. If domestic supply is available at sharply increasing costs, or if supply is such as to ensure that prices embody large elements of economic rents, any attempt to export tax burdens to foreigners may fail. Regardless of demand elasticities, the potential taxpayer (who will also be potential supplier of the taxed good and, hence, a potential rent recipient) may not want to allow government to have access to a tax base characterized by low supply elasticity.

The conclusions above relate to taxes on domestically produced goods and services, on exports, broadly considered. The same sort of analysis may, of course, be applied to imports, with the obverse relationships being relevant. If foreign supply to the domestic market is relatively inelastic whereas domestic demand is relatively elastic, the levy of a tax on such a good would be borne largely if not exclusively by foreign citizens rather than those who are resident of the tax-levying jurisdiction. Burden shifting by means of taxes on imports may not be an important instrument for exploitation by a small country, however, since foreign supplies of most goods, to that country, may be highly elastic. On the other hand, when large countries are considered, the whole problem of possible retaliation among a small number of trading countries must be incorporated into the analysis.

Detailed consideration of various possible cases need not be worked out here. It should be clear that the constitutional assignment problem in an open economy involves a set of different prospects from those that are relevant to the closed economy setting. With precisely the same model of political process, and with the same preferences for publicly provided goods and services, an individual in an open economy will select a differing range and mix of taxing powers to be allowed to government. He will allow Leviathan access to tax bases that promise a higher potential revenue yield than would be true in a closed economy, and he will tend to choose different bases in accordance with the export-potential criteria sketched out above.

The “prisoners’ dilemma” aspects of tax competition among separate states cannot substantially modify these general results. The individual, at the constitutional choice stage when initial taxing authority is assignable to government, may recognize that if different governments try to export tax burdens to citizens beyond their jurisdictions, the net result, for citizens of all jurisdictions, may be harmful. It would be better, for everyone, if each government should be constrained so that no tax burden exportation could exist. But the individual is not placed in a position, even conceptually, to choose “the tax constitution for the world.” At best, he can partially constrain the taxing powers of his own national state by constitutional means. In such a choice setting, the individual must consider tax exportation prospects, regardless of the dilemma created by a world regime of mutual retaliation. If he fails to do so, if he selects domestic tax rules on some Kantian-like principle of generalization, he must reckon on being exploited fiscally by the taxing powers assigned to governments other than his own and over which he has no control. The individual will find himself, and his fellow nationals, paying the ultimate costs of public goods and services enjoyed by citizens of other states and also financing the surpluses of the Leviathan rulers of those governments. At the same time, citizens of other countries will be escaping possible payments for at least some share of domestically supplied public goods and some share in the financing of the home-grown Leviathan’s surplus. In a world of dog eat dog, the dog that does not eat gets eaten.