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

10.5.

Aggregate Revenue and Outlay Limits: Ratio-Type Proposals for Constitutional Constraint

Most economists who support some constitutional constraints on governmental fiscal powers beyond those in being tend to favor that set of proposals that attempts somehow to relate aggregate revenues or outlays to some aggregate economic base, such as total income or product. In 1973, one of the first of this type of proposals, Proposition 1 in California, was soundly defeated in a referendum. In 1978, proposals of this nature were made parts of the state constitutions in Tennessee, by convention, and in Michigan, by a referendum vote. In early 1979, the National Tax Limitation Committee sponsored a proposed amendment of this type to the U.S. Constitution. As drafted, and as introduced for consideration in the U.S. Senate, this amendment would restrict percentage increases in rates of federal government outlays to percentage increases in gross national product over preceding years, with a tempering adjustment designed to penalize government for generating inflation. The state proposals, somewhat more simply, tie state tax revenues or state outlays directly to state income, in proportionate terms, more or less at the status quo of the date of enactment.

Aggregate revenue and outlay constraints, defined in relative terms, appeal to economists because they seem to be directed at the central objective, which is one of limiting the overall size of government, of keeping the Leviathan-like proclivities that seem to have surfaced only in recent years from further encroachment on the private sector of the economy. By contrast with these apparently direct approaches, rate and base limits necessarily seem to leave more scope for governmental manipulation and evasion, still within the allowable fiscal powers of the constitution. With some effective aggregate revenue or outlay limits, governments would be forced to nonfiscal alternatives in order to evade the constitutional requirements.

On the other hand, ratio-type proposals have major disadvantages which may well prevent their effective implementation. The proposals seek to establish some constitutionally enforceable relationship between revenue or outlay totals (R and/or G) and the total income or product in the economy (NI or GNP). Both elements in this sort of relationship are aggregates that require, first, abstract definitions, and, second, expert measurement by specific criteria. Neither element in the relationship carries direct meaning for the taxpayer other than as an abstract idea. Neither element means much in personally measurable value. By sharp contrast, a rate or base limit is readily translatable into personal terms. The taxpayer knows roughly what the Jarvis-Gann ceiling of 1 percent of market value implies for her tax bill next year. And a taxpayer also would know what it means when the government is not allowed to tax interest on municipal bonds or on the rental value of owned homes. Generalized taxpayer support for base and rate constraints falls within the realm of the possible in the constitutional tax-policy debates. Comparable support for ratio-type proposals to limit government’s fiscal powers may be exceedingly difficult to organize.

Another difficulty with ratio-type proposals lies in the relationship between the specific ratios or shares that are normally suggested and the currently existing status quo. There is little other than historical accident that determines the government’s current share in aggregate product. Why should this share necessarily be frozen at its 1980 limits? Arguments may be advanced concerning the appropriate share, quite independently of the present limits, but the constitutional-policy discussion has not, to this point, taken this form. It becomes difficult, therefore, to assess the whole ratio-type approach to fiscal constraint on analytical grounds that are comparable to our earlier discussion of rate and base limits.7

[7. ] For a general discussion of tax limits in the context of the 1978 issues, see Geoffrey Brennan and James M. Buchanan, “The Logic of Tax Limits,” National Tax Journal, 32 (June 1979), 11-22.