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

10.6.

Procedural Limits: Qualified Majorities and Budget Balance

All of the proposals for constraining the fiscal powers of government that have been examined in Sections 10.3 through 10.5 can be classified as result- or end-state-directed, in one sense or another. They are designed to set specific limits on what government can and cannot do. They involve the setting of maximum rates on specific tax rates, the defining of the bases upon which government is to be allowed to levy taxes, and the maximum shares in total economic income or product that government is to be allowed to take and to spend. None of these proposals is directed at the governmental decision structure as such. None of the proposals is aimed at processes or procedures through which end-state results are produced. An alternative, and conceptually quite distinct, approach to constraining government’s overall fiscal powers is to modify and to limit the structure within which governmental outcomes emerge.

Mention was made earlier in this chapter of Hayek’s proposal to separate the power for setting the tax-share distribution among individuals and groups and the power of setting the level of tax rates, given the tax-share distribution. This proposal falls within what we shall call here the set of procedural constraints on fiscal powers. Earlier in the book we have, on several occasions, made reference to Knut Wicksell’s proposals for constitutional change which took the form of requiring qualified majority approval of spending legislation by members of legislative assemblies. Wicksell moved from his idealized process requiring unanimous approval to the qualified majority process which involves the approval of as much as five-sixths of the members. Some participants in the discussion of the 1970s have called for constitutional requirements that dictate three-fifths, or two-thirds, approval of spending legislation in legislatures. Proposition 13 in California, in one of its less familiar clauses, requires a two-thirds majority in the state legislature for the enactment of new taxes. Further, almost all of the specific proposals previously discussed are framed in such a way as to include escape clauses, for overriding restrictive limits in times of war or national emergency. These escape clauses are almost all stated in terms of qualified majority approval in state or national legislative bodies.

These procedural reform proposals seek to constrain fiscal outcomes indirectly by modifying the process through which governments are allowed to reach fiscal decisions. One particular proposal that falls within this set has received widespread support and warrants brief discussion here. In early 1979, thirty state legislatures had approved resolutions calling for a constitutional convention for the purpose of adding a budget-balance amendment to the U.S. Constitution. Some thirty members of the U.S. Senate had sponsored resolutions that would have proposed such an amendment to the constitution but without the convention route. In effect, the proposal for requiring the federal government to balance its budget is designed only to ensure that government cover its outlays with tax revenues rather than with public-debt issue or with new money creation. It does not aim directly at the level of revenues or outlays. In a sense, this proposal may also be interpreted as falling within the base-limit set; this would be the case if we should treat public-debt issue and money creation as forms of taxes. The amendment would effectively deny these “tax bases” to government. In a more fundamental sense, however, the amendment for budget balance may be interpreted in procedural terms. It seeks to modify the governmental decision process by requiring that decision makers, whoever these may be, balance off costs against benefits.

It may be argued that budget balance was a part of the existing fiscal constitution of the United States prior to the Keynesian revolution in the theory of economic policy. Even if the constitution did not contain a formal, written requirement for budget balance, governmental decision makers acted as if such a constraint did limit their fiscal behavior. The effect of the Keynesian revolution was to repeal this part of the fiscal constitution.8 Much of the support for the introduction of an explicit constitutional provision for budget balance in the 1970s stems from a widening recognition that, in the absence of such a constraint, governments will revert to their quite natural tendency to generate budget deficits almost continually.

In comparison with the more restrictive proposals for constitutional change, the budget-balance amendment, if approved, would not seriously constrain Leviathan’s fiscal appetites. On the other hand, proponents of the amendment predict that the electoral checks on governmental process will work much more effectively if governments are prevented from concealing the genuine costs of governmental outlays through deficit creation. In one sense, budget balance might be considered as a first step toward more comprehensive constitutional constraints on the fiscal powers of modern governments.

[8. ] This theme is developed at length in James M. Buchanan and Richard E. Wagner, Democracy in Deficit (New York: Academic Press, 1977).