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

10.3.

Tax-Rate Limits: The Logic of Proposition 13

The most significant fiscal event of the late 1970s was the approval of Proposition 13 in California in June 1978. In a state-wide referendum, voters by a two-to-one margin approved a constitutional limit to restrict the tax on real property to 1 percent of market value. There were many features of Proposition 13 peculiar to the California fiscal-political environment in 1978 that need not be examined here. It is instructive, however, to try to look at this event within the analytical framework of this book. From a truly constitutional perspective, is there any logical basis for imposing maximum limits on rates for specific taxes? Are there plausible reasons for predicting that maximum rate limits will be imposed on real property taxes but not on other taxes? What are the predicted consequences of constitutional rate constraints on some but not all of the tax instruments within a government’s fiscal bag? Can rate limits alone restrict total spending? Can rate limits offer any guarantee of equal relative treatment?

It is first of all necessary to distinguish clearly between constitutionally imposed limits on rates for specific taxes and constitutionally imposed limits on overall revenue collections, defined as some share of product or income and, hence, as some inclusive “rate” of tax. We shall postpone discussion of the latter type of limits until Section 10.5. In this section, we shall discuss rate limits for specific taxes.

If the potential taxpayer in some constitutional choice setting conceives of government in Leviathan terms, he will recognize that the imposition of maximum rates for any particular tax will result in a diversion of fiscal pressures toward those taxes that may not fall under the rate-limit constraint. However, any rate limit on one tax from among the allowable set available to government must reduce the total revenue potential collectible by government from the whole set. Whether or not the introduction of specific rate limits offers a desirable or efficient means of achieving the overall absolute constraint on revenues that may be desired is another issue.

There may be desired objectives of constitutional tax policy that are at least partially independent of the aggregate results defined in terms of total revenue potential. Rate or base limits may be aimed at some of these peripheral objectives, even if the taxpayer is not primarily concerned with the absolute levels of revenue potentially extractable from the citizenry. In the analysis of Chapter 5, the announcement effects of taxes were discussed with special reference to taxes on wealth. Emphasis was placed on the temporal dimension, which separates the taxpayer’s decisions on saving and capital accumulation from the potential tax levy by government. The extreme vulnerability of the individual to fiscal exploitation in this setting relative to that in which he can make behavioral adjustments after taxes are announced will be recognized by the individual at the constitutional state of deliberation. The analysis of Chapter 5 suggested that the individual would be reluctant to grant government the constitutional authority to levy taxes on wealth and capital.

The most important tax on wealth in most fiscal systems is the tax on real property. We observe that this tax is largely concentrated within the fiscal authority of localized units of government. And there is a sound, logical reason for such a constitutional assignment of tax base, as our analysis makes clear. The prospect for interunit resource mobility, human and nonhuman, tends to restrict the potential exploitation of the real property tax. If, however, local units are not sufficiently competitive, one with another, and if strictly locational rents are significant, localized assignment alone may not provide effective guarantees. In this case, individuals may reasonably demand some imposition of maximum rate limits in order to allow the making of long-term decisions concerning investments in real assets.

Individuals save in order to accumulate wealth, but the rate of saving in any one period is small relative to the total value of wealth potentially accumulated. A rational saving plan, projected forward through many periods, requires that the individual possess some reasonably accurate expectations concerning the tax liabilities that asset ownership will involve. He cannot readily adjust his desired portfolio to changing tax burdens. And for most taxpayers, the purchase of real property represents a commitment to a long-term saving-investment profile, and one that is not readily adjustable at the margins of value. Some constitutional guarantee that the tax claims against such assets will not exceed a specific share of market value may be desired by substantially all potential taxpayers, quite independently of personal persuasion concerning the proper size of government or the proper place of a property tax within the overall tax mix.

It should not, therefore, be surprising that Proposition 13 embodied rate limits on the tax on property values and that other tax-protest emphases have been somewhat differently orchestrated. The assessment here does not, of course, enable us to say anything at all about the appropriateness of the particular rate limit adopted. The argument suggests only that there may be a logical basis for imposing maximum rate limits on taxes on wealth. We should predict, therefore, that this approach toward fiscal constraints, generally, will be more likely to surface with respect to wealth and capital taxes, along with specific limits on public-debt issue, which involves somewhat comparable logical support.