Front Page Titles (by Subject) 10.2.: Tax Reform as Tax Limits - The Collected Works of James M. Buchanan, Vol. 9 (The Power to Tax: Analytical Foundations of a Fiscal Constitution)
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10.2.: Tax Reform as Tax Limits - James M. Buchanan, The Collected Works of James M. Buchanan, Vol. 9 (The Power to Tax: Analytical Foundations of a Fiscal Constitution) 
The Collected Works of James M. Buchanan, Vol. 9 The Power to Tax: Analytical Foundations of a Fiscal Constitution, Foreword by Geoffrey Brennan (Indianapolis: Liberty Fund, 2000).
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Tax Reform as Tax Limits
I would add, however, that there are certain tax “reforms” under discussion that threaten to contract rather than to augment net tax revenues and therefore tend in the wrong direction. [Italics added.]
—E. S. Phelps, “Rational Taxation,” Social Research, p. 666
The intellectual integrity of E. S. Phelps, as indicated in the citation above, is to be applauded. But in his candor, he has really let the cat out of the bag of orthodox tax-reform advocacy. As our earlier analysis has revealed in more technical detail, many of the orthodox proposals for “tax reform,” especially those that are alleged to be directed toward the achievement of enhanced economic efficiency, may be reinterpreted as directives that suggest how Leviathan may secure additional revenues. “Minimization of excess burden” and “maximization of net tax revenues” become, in many instances, the two sides of the same coin. Income-tax-reform advocacy provides the simplest, and most important, illustration. The dominant emphasis is on making the tax base more comprehensive rather than less, a suggested “reform” that would, if enacted, tend to ensure a larger total tax take under political assumptions that allow any scope at all for Leviathan proclivities. Similarly, proposals for commodity taxation involve the introduction of differential rates that are related to the different degrees of substitutability between taxed and nontaxed outlays.
These, and other, suggestions for “tax reform” are justified within the strict confines of the economists’ ivory tower by the equi-revenue framework imposed on analysis. The suggested changes are made to appear almost wertfrei, and they seem to allow the “oughts” of tax reform to be derived from the minimal ethical postulate required for the acceptance of the Pareto criterion. However, the very usage of the equi-revenue constraint depends upon the acceptance of the benevolent despotism model of politics, a proviso that is rarely made explicit and may not even be realized by many of those who participate in the discussion. Such an acceptance is not merely something that is convenient for analysis and without substantive importance. It has implications for the real fiscal world of taxing and spending.
We may illustrate by analogy. “It is costly to build a fence or to purchase a chain. It is possible to prove that the no-fence, no-chain solution is more efficient than either, provided that we model the behavior of our dog in such a way that he respects the boundaries of our property.” As we have put this example from personal experience, the exercise seems, and is, absurd. But is it really very different from that procedure which argues that tax structure X is more “efficient” than tax structure Y provided that we model the behavior of government in such a way that it seeks only to further efficiency in revenue collection?
Once the benevolent despotism model of governmental behavior is abandoned, the orthodox suggestions for tax reform that tend to emerge from the equi-revenue analytical framework cannot stand alone. Alternative tax institutions and rules must be evaluated on criteria other than efficiency and equity, although, of course, these standard objectives remain relevant. If, for example, the comprehensiveness in income-tax base suggested by the efficiency criterion is predicted to offer Leviathan the opportunity to extract more revenues from taxpayers, this instrumental target for reform may well be discarded in favor of some alternative that produces more effective predicted results consistent with the political model adopted. As the analysis of earlier chapters has indicated, a change in the political model may turn many of the orthodox precepts for tax change on their heads.
In almost any nonbenevolent model of political process, which need not, of course, be so severe as the specific Leviathan constructions we have introduced, the choice of the desired “tax constitution” arises, and this constitution is defined by the constraints or limits that it places on government’s power to tax. The tax-reform exercise becomes categorically different from that which posits the giving of normative advice to the benevolent and all-wise government. In the latter, and standard, version, any constitutional-legal constraint on the ability of the fiscal authority to respond directly to the advice so proffered can only be negatively valued. “Good” government can only be limited from doing “good.” The desire to limit government constitutionally, to define in advance the range and scope for the subsequent implementation of the taxing authority, arises only from a presumption-prediction that government may, at least on some occasions, act in ways that are not within the interests of taxpayers. In this setting, the tax-reform exercise becomes that of choosing among alternative sets of limits.
We shall, in subsequent sections of this chapter, examine some of the fiscal limits that have been discussed in the “tax revolt” of the late 1970s. Before launching into such an institutional array, however, it is useful to look briefly at the possible objectives for “constitutional tax policy,” considered in their more general sense. On the assumption that the potential taxpayer, at the stage of constitutional choice, does not model government in idealized terms, what protections will he try to secure through constitutional limits on the power to tax? We may distinguish between relative and absolute guarantees. The individual may be interested in his own position in the postconstitutional budgetary sequence relative to other persons in the political community. He also may be interested in his position vis-à-vis the fiscal authority defined or described in absolute terms.
Some insurance that the fisc will not arbitrarily discriminate against the individual, any individual, may be a desired feature of almost any acceptable constitutional-policy set. This objective is, of course, the same as that which appears in different guise under the horizontal equity norm of the traditional tax literature and also under the more inclusive “legal equality” norm familiar in the discourse of jurisprudence. The methodological advantage of the veil-of-ignorance-constitutional analysis is that it allows us to derive the logical basis for such a norm from the choices of the individual rather than from some presumed external ethical standard. As we have noted in earlier chapters, existing fiscal or tax constitutions in Western nations incorporate some of the limits against arbitrary discrimination in the distribution of tax shares that almost any person’s “efficient” constitution would embody.
Existing constitutions do not, however, embody protections to the potential taxpayer in the absolute dimension. In the United States, existing constitutional law would presumably prevent the levy of a confiscatory tax on Mr. A while allowing Mr. B to remain free of tax, assuming that both persons are, somehow, “equally situated” as deemed relevant for tax purposes. By contrast, there is nothing in existing constitutional law or its interpretation that would deter government from levying a confiscatory tax on both Mr. A and Mr. B. Much of the support for new and additional constitutional constraints on government’s fiscal powers stems from a general, if vague, sense of the existence of this anomaly in the fiscal constitution.
Our Leviathan construction is helpful in isolating and identifying the potential value of constitutional protection against absolute exploitation of the individual by the state. The requirement for uniformity in treatment, or insurance against relative tax deprivation, has been shown to complement constraints aimed at limiting absolute revenue potential in many cases. The significant exception here lies in the possible revenue productivity of progressive and proportional taxation. If the uniformity or legal equality precept is interpreted to require rate proportionality, as it is by Hayek and as it was by the U.S. judiciary prior to the passage of the Sixteenth Amendment in 1913, the shift to nonuniformity in the direction of rate progression may well tend to reduce rather than to enhance the maximum revenue potential available to the fiscal authority. This possible relationship tends to be obscured by the American historical experience in which the twentieth-century federal government revenue explosion was facilitated by the introduction of progressivity in rate structures. Rate progression serves to ensure that revenues increase disproportionately with real economic growth and with inflation, but this relationship would also operate under proportionality if rates should be set and adjusted continuously to revenue-maximizing levels.
It is inappropriate in this summary chapter to expand and elaborate analysis that has been developed earlier. But it is useful to remind those who seek to move toward tax-rate uniformity as a means of constraining overall revenue growth that the relationship may sometimes be reversed. The aggregate revenue potential of a broad-based proportional tax (e.g., a value-added tax) tends always to be greater than the aggregate revenue potential of a highly progressive tax on a roughly comparable base. The argument here is not to suggest that movement toward more restrictive constitutional guarantees of tax-rate uniformity may be undesirable. Our point is only that, in some cases, the guarantee of equality of tax treatment may be secured at the partial expense of tighter guarantees against absolute revenue limits.
One further qualification should be made before we discuss specific proposals for constitutional constraints on the taxing power, as these have variously emerged in the 1970s. For the most part, and almost necessarily, the debates over constitutional tax policy have proceeded in a setting where the economic positions of individuals and taxpaying groups are well identified, at least over short-term planning horizons. In such a setting, self-interest dictates, of course, that individuals and groups favor policy actions that promise to yield the most advantageous results. That is, the conflict over the assignment of tax shares implicit in all the orthodox tax-reform advocacy is not absent from the conflict over constitutional tax policy.
Nonetheless, this conflict is necessarily reduced in the constitutional choice setting. When tax rules are treated as quasi-permanent features of the legal structure, individuals are naturally more uncertain about the effects of differing rules on their own positions.6 Further, the conflict need not emerge at all, whereas it must emerge in the alternative tax-share allocation context.
[6. ] For a comprehensive analysis of the effects of extensions in the time sequence of tax rules on the prospects for securing agreement among persons, see Antonio Pinto Barbosa, “The Constitutional Approach to the Fiscal Process: An Inquiry into Some Logical Foundations,” Ph.D. Dissertation, Virginia Polytechnic Institute and State University, 1978.