James M. Buchanan

The power to tax : analytical foundations of a fiscal constitution

Preface 1. Taxation in constitutional perspective 2. Natural government: a model of Leviathan 3. Constraints on base and rate structure 4. The taxation of commodities 5. Taxation through time: income taxes, capital taxes, and public debt 6. Money creation and taxation 7. The disposition of public revenues 8. The domain of politics 9. Open economy, federalism, and taxing authority 10. Toward authentic tax reform: prospects and prescriptions Epilogue Notes Selected bibliography Index.

Towards a tax constitution for Leviathan

Abstract This paper attempts to derive normative tax rules based on the constitutional calculus of the typical voter–taxpayer when he predicts that post-constitutional political processes will be dominated by a budget-maximizing Leviathan-like bureaucracy. In this setting, selection of tax institutions becomes part of the apparatus by which Leviathan is constrained. Such an approach generates tax rules strikingly at variance with more conventional norms. In particular, the goal of a ‘comprehensive’ tax base, which informs standard analysis, gives way to a preference for specific limitations on the width of the tax base: moves towards a greater comprehensiveness will lead inexorably to larger public spending, and beyond some point are clearly undesirable. The analysis also implies a rather unconventional defense of progression in the tax structure. An attempt is made to relate the discussion to contemporary tax reform issues.

Symmetric Tragedies: Commons and Anticommons*

An anticommons problem arises when there exist multiple rights to exclude. In a lengthy law review paper, Michael A. Heller has examined “The Tragedy of the Anticommons,” especially in regard to disappointing experiences with efforts to shift from socialist to market institutions in Russia. In an early footnote, Heller suggests that a formal economic model of the anticommons has not been developed. This paper responds to Hellers challenge. We analyze the anticommons problem in which resources are inefficiently underutilized rather than overutilized, as in the familiar commons setting. The two problems are shown to be symmetrical in several respects. We present an algebraic and geometric illustration and extend the discussion to several applications. Of greater importance, we suggest that the construction is helpful in understanding the sources of major value wastage in modern regulatory bureaucracy.

The domain of constitutional economics

Constitutional political economy is a research program that directs inquiry to the working properties of rules, and institutions within which individuals interact, and the processes through which these rules and institutions are chosen or come into being. The emphasis on the choice of constraints distinguishes this research program from conventional economics, while the emphasis on cooperative rather than conflictual interaction distinguishes the program from much of conventional political science. Methodological individualism and rational choice may be identified as elements in the hard core of the research program.

Social Choice, Democracy, and Free Markets

p OFESSOR Kenneth Arrows provocative essay, Social Choice and Individual Values,2 has stimulated a great deal of comment and discussion during the two years since its publication. Reviewers and discussants have been primarily concerned with those formal aspects of Arrows analysis which relate to modern welfare economics. This concentration, which is explained by both the stated purpose of the work and the tools with which it is developed, has resulted in the neglect of the broader philosophical implications of the essay.3 In this paper I propose to examine the arguments of Arrow and his critics within a more inclusive frame of reference. This approach reveals a weakness in the formal analysis itself and demonstrates that some of the more significant implications drawn from the analysis are inappropriate. I shall first review briefly Arrows argument, in order to isolate the source of much of the confusion which has been generated by it. Following this, I shall raise some questions concerning the philosophical basis of the concept of social rationality. In the next section I shall

The Market as a Creative Process

Contributions in modern theoretical physics and chemistry on the behavior of nonlinear systems, exemplified by Ilya Prigogines work on the thermodynamics of open systems (Prigogine and Stengers, 1984), attract growing attention in economics (Anderson, Arrow, and Pines, 1988; Arthur, 1990; Baumol and Benhabib, 1989; Mirowski, 1990; Radzicki, 1990). Our purpose here is to relate the new orientation in the natural sciences to a particular nonorthodox strand of thought within economics. All that is needed for this purpose is some appreciation of the general thrust of the enterprise, which involves a shift of perspective from the determinism of conventional physics (which presumably inspired the neoclassical research program in economics) to the nonteleological open-endedness, creative, and nondetermined nature of evolutionary processes.

Barro on the Ricardian Equivalence Theorem

Is public debt issue equivalent to taxation? This is an age-old question in public finance theory. David Ricardo presented the case for the affirmative.1 Professor Robert J. Barro reexamines the question in his recent paper (1974) without, however, making reference to Ricardo or other early contributors. Although his discussion is carefully qualified to allow for exceptions under specified conditions, the thrust of Barros argument supports the Ricardian theorem to the effect that taxation and public debt issue exert basically equivalent effects. Barros central emphasis is on demonstrating that, under reasonable conditions which involve overlapping generations of persons with finite lives, taxpayers will capitalize the future obligations that public debt issue embodies. To the extent that this capitalization occurs, government bonds do not add to the perceived net wealth in the economy. From this Barro infers that the substitution of debt for tax finance will exert no expansionary effect on total spending. There are two questions here. Are the future tax liabilities fully capitalized? And, even if they are, does this necessarily imply that the fiscal policy shift exerts no effect on total spending? To establish the second result, it is necessary to examine the differential impacts of taxation and debt issue, quite apart from the question of the capitalization of future taxes. Barro wholly neglects this necessary part of any comparative analysis of the two fiscal instruments, and, because of this neglect, his conclusion is not nearly so relevant for policy as it seems to be. This neglect may stem from Barros failure to specify properly the inclusive set of transactions that debt issue represents.

The Economics of Earmarked Taxes

ECONOMISTS do not agree on the effects of earmarking. For example, Julius Margolis and Walter Heller suggest that the earmarking or segregating of fiscal accounts tends to reduce the willingness of taxpayers to approve expenditures on specific public services.2 By contrast, Earl Rolph and George Break, along with Jesse Burkhead, discuss earmarking as one device for generating taxpayer support for expansion in particular services.3 The staff of the Tax Foundation, in a more comprehensive study, have expressed views in accord with the latter position.4

Interests and Theories in Constitutional Choice

The paper contrasts two interpretations of the role of agreement in politics, a social contract notion and a dialogue notion. It is argued that the two notions can be viewed as complementing each other if one explicitly separates two components in human choice that in rational choice theory are often inseparably blended in the concept of preferences - an interest-component and a theory component. It is suggested that the contractarian agreement notion primarily focusses on the interest-component; the dialogue notion on the theory-component in constitutional choice.

Liberty, market, and state : political economy in the 1980s

Most economists read more than they write. James Buchanan manages to write more than most economists can read. Because his varied writings on social philosophy and political economy are necessarily scattered among publications around the globe, Buchanan’s latest book, Liberty, Market and State, should prove to be a valuable collection to Buchanan watchers. It brings together his writings under therubric of“constitutional political economy,” or what I prefer to call “constitutional economics.” This book is of significance to the readers of this journal for two fundamental reasons. First, it breaks irrevocably with the conventional wisdom among economists, namely, that economics as a discipline, per Se, has little or nothing to contribute to ourunderstanding ofnormative matter, including justice, fairness, and morality. Economists are able to assume the role of the detached observer-analyst largely because the rules of the market and/or political game are assumed to be given, meaning the distribution ofpower, an intrinsically ethical matter, has already been determined. With matters of power given by assumption, economists are largely free to discuss how people trade to improve their lot. “The predictive ‘science of economics,’” Buchanan writes, “is positively valuable to government agents, business firms, andprivate individuals. Persons can ‘play better games’ if they can predict their opponents’ strategy more accurately” (p. 33). However, the realm of the “science of political economy” has, according to Buchanan, a much different purpose: “to evaluate the structure of the constraints, ‘the law,’ with some ultimate objective of redesign or reform aimed at securing enhanced efficiency in the exploitation of the potential mutuality of alternative systems” (p. 33). ,The science of (constitutional) political economy cannot sidestep normative matters or even the question of how alternative systems of constraints can and should be evaluated. Throughout the book, Buchanan espouses general agreement as the critical normative test for adoptions of social systems or reforms in those systems: