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

9.2.

Tax Rules in an Open Economy with Trade and Migration

The economic interdependence among persons in different political jurisdictions changes dramatically when trade in final goods is supplemented by the prospects of resource mobility across governmental boundaries. If persons are free not only to engage in trade but also to shift capital and labor resources in response to differential economic signals, the economy becomes genuinely international, even if political units remain separate. It should be evident that the constitutional choice problem concerning the initial grant of taxing authority becomes different in this setting from that faced in either the closed-economy-closed-polity model of earlier chapters or the open economy-with-trade model examined above.

Freedom of trade and migration among separate governmental units acts as a substitute for overt fiscal constraints. In this sense, free trade and migration parallel in effect some of the Wicksell-like procedural rules examined in Chapter 8. By contrast with the latter, however, the indirect controls over Leviathan exercised by free international economic exchange seem closer to the realm of the institutionally politically feasible, at least in Western nations, than do the required procedural departures from majoritarian electoral processes.

The limiting case of free trade and migration is the idealized Tiebout world.1 Assume a world of competing governments, each one of which supplies some public goods to its citizens, public goods whose benefits do not spill over beyond the boundaries of the individual polity. Each “national” government is, we assume, modeled as a revenue-seeking, surplus-maximizing Leviathan. Migration across governmental boundaries is, however, also assumed to be costless. Further, let us assume that persons are motivated exclusively by the economic returns available to them. No persons exhibit personal preferences as to jurisdiction of residence, and no persons earn locational rents. In this extreme case, there is no surplus available for potential exploitation by any potential Leviathan in the resource equilibrium generated by the voluntary decisions of persons in the whole international economy. Each governmental unit, regardless of its motivations to maximize net revenue surplus, will find it necessary to offer public goods in the efficient quantities desired and to finance these goods efficiently. In this limiting case, freedom of trade and migration will render any overt fiscal constraints unnecessary.

Once we depart ever so slightly from this extremely restrictive model, however, the idealized Tiebout process will not fully substitute for constitutional tax rules or limits, even if we continue to allow for costless migration.2 If locational rents accrue to persons in particular places of residence or occupation and/or if personal preferences as among the separate locations are known to exist, a potential surplus for governmental exploitation becomes available. Interestingly, the governmental jurisdiction that is most “favorably situated” in terms of the generation of locational rents, on the production or the utility side of the individual’s choice calculus, opens up the prospect for the relatively greater degree of fiscal exploitation. Those governmental jurisdictions that are “pedestrian” in the sense that they offer no locational rents at all, in utility or in production (they have neither sunny beaches nor oil beneath the rocks), may remain immune from the fiscal inroads of Leviathan.3

At the constitutional stage of consideration, the individual who looks upon his jurisdiction as possessing, actually or potentially, the capacity to generate locational rents, may seek to impose overt constraints on the taxing power. But even in such cases, the effectiveness of freedom of trade and migration in serving as a substitute for such direct constraints should not be overlooked. On the other hand, unless free trade and free migration are themselves constitutionally guaranteed, the indirect limits that these controls might impose on the fiscal proclivities of Leviathan cannot be predicted to operate. Nor is an individual, at some initial constitutional stage, likely to prefer open migration on a one-way basis. That is, the individual may not want to ensure that migrants from other jurisdictions can freely enter into his own unless reciprocal guarantees of free outmigration and immigration into other jurisdictions are also offered. These latter guarantees cannot, of course, emerge in the constitution making for a single jurisdiction. Further, even in a world where such guarantees might emerge from some multinational convention, predicted disparities in income and wealth levels among persons of separate jurisdictions may make free migration undesirable for members of particular jurisdictions. The protection against the fiscal exploitation of Leviathan that the opening up of governmental boundaries offers may not outweigh the predicted costs in locational rents destroyed by such action.

For the foregoing and other considerations, the full substitutability of trade and migration for explicit constraints on governmental fiscal authority does not seem likely to characterize the constitutional calculus. Although he might well recognize the relationships here, the person who has an option at the constitutional stage would presumably select some constraint on governmental taxing power even in a world that is predicted to be characterized as truly international or interjurisdictional.

[1. ] Charles M. Tiebout, “A Pure Theory of Local Government Expenditures,” Journal of Political Economy, 60 (October 1956), 415-24.

[2. ] David Friedman has analyzed a regime of competitive revenue-maximizing nations, with costless migration, but with attractiveness related to population density. See his “A Competitive Model of Exploitative Taxation,” mimeographed, Virginia Polytechnic Institute and State University, August 1979. See also Dennis Epple and Allan Zelenitz, “Competition among Jurisdictions and the Monopoly Power of Governments,” Working Paper, Graduate School of Industrial Administration, Carnegie-Mellon University, March 1979.

[3. ] Does Hong Kong offer a real-world example? Interestingly, we observe little or no fiscal exploitation of Hong Kong citizens by the Hong Kong government.