The Online Library of Liberty

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• 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

10.4.

Tax-Base Constraints

Proposals to introduce new constitutional restrictions on the bases for taxation made available to government were not within the set of suggestions for practical constitutional reform in the late 1970s. However, as our analysis, particularly that developed in Chapters 3 and 4, suggests, base constraints warrant more serious consideration. Moreover, one important reason for directing attention to tax-base questions is that orthodox tax advocacy is preoccupied with this aspect of tax reform. The policy stance that emerges from the conventional treatment, and that is now taken for granted in virtually all professional discussion of tax policy, leads inexorably to broader tax bases and correspondingly larger potential tax revenues. Much of our discussion is designed to indicate the extent to which such policies depend on heroic political assumptions. Apart from our intellectual and academic purposes, however, we believe that tax-base limitations may have a practical role to play in “tax-limit” policy.

One way of looking at tax-base assignment is in terms of “governmental property rights.” As we noted, the constitutional delegation of that base amounts to the assignment of a monopoly franchise in the exploitation of that base. The behavior of government, in possession of such a franchise, becomes predictable in a manner analogous to that of the profit-seeking monopoly firm. And with an ability to make such predictions, individuals can anticipate and plan for their own adjustment responses. If the tax-base assignment is made with care, individuals will be protected against undue fiscal exploitation without more complex constraints on the fiscal authority.

The individual will not, of course, want to allow government access to taxable bases that are sufficiently general (inclusive, comprehensive) to allow the generation of revenues far in excess of estimated public-goods financing requirements, given some complementary estimates for the share of collected revenues likely to be expended on goods provision. To ensure that base restrictions will indeed be constraining on governmental action, the individual must try to ensure that government will limit its tax-rate imposition because of the predicted behavioral responses of taxpayers, responses that will, beyond certain rate limits, reduce rather than increase total revenues.

If we translate this relationship into the tax-reform jargon, we can say that the individual at the constitutional stage will seek deliberately to build certain “loopholes” or “escape routes” into the tax structure. These provide the protection or guarantee against undue fiscal exploitation that the individual wants the constitution to embody. This argument in favor of loopholes and against comprehensiveness in tax base runs directly counter to the norm or principle that is central to much of the orthodox tax-reform advocacy.

In this summary section, it may be useful to specify precisely what sort of “defense of loopholes” our analysis implies, and to discuss this defense in the context of existing tax systems. The argument for leaving open avenues for flexibility in behavioral response to tax rates suggests the rationality of constitutional loopholes. But what about a possible postconstitutional opening up of loopholes or maneuvering of an agreed-on tax base? Is this action a desirable or undesirable characteristic of in-period political “reform”? The answer to this question must be ambiguous. On the one hand, unless the rate structure is effectively constrained, a Leviathan government could, through a combination of high nominal tax rates and a set of tax preferences, move toward the discriminating monopoly level of revenue analyzed in Chapter 4. On the other hand, governments may seek to further particular objectives other than straightforward revenue maximization by manipulation of tax rules. “Tax preferences” may be granted to citizens in “exchange” for certain modifications in their behavior. To the extent that affected taxpayers respond, they are clearly better off than they would be without the tax preference. Other taxpayers need be no worse off; their tax treatment by a Leviathan government would be unaffected; and the activities of others encouraged by the tax preference will, presumably, exert favorable spillover effects at least equal to any reduction in public-goods financing necessitated by the reduction in tax revenues. Our analysis suggests, therefore, that there may be an important normative distinction between constitutionally and postconstitutionally imposed tax loopholes.