James P. Buchanan,
Public Finance in Democratic Processes:
Fiscal Institutions and Indvidual Choice, The University of North Carolina
Press, Chapel Hill, 1967.
Earmarking
The public can vote on the budget and tax rates, independently, or
in the aggregate. That is, they can vote on a budget in one section
of the web screen, how much to be spent on each item. Separately,
they can come up with the taxing algorithm.
I proposed such a solution a while ago when many States were confronting
(and now are) facing red ink and difficulties in achieving the political
will to confront their budget problem. One can vote for the taxes
to support all public goods combined. One also votes independently
on how the money is to be spent.
However, another option is for the voting system to have the voters
vote separately for each public good and for the taxes to carry them out.
This was implicit in the discussion of Lindahl Equilibrium
Dr. Buchanan has some graphical and algebraic models of the differences.
I will create my own set for this group.(But I will probably do it during
a break when I am not teaching.)
In 1963, 41 per cent of state tax collections to specific functions and it was over fifty
percent in
the 1950's.
Buchanan showed that the general fund mechanism gave a suboptimal voting
and people would be more likely to get the amount of expenditures they
wanted if they could vote independently for the taxes for each of two
public goods. The Libertarian Right believes that
having taxes earmarked for specific expenditures would better inform
voters of what each public benefit from government truly costs.
(This reminds me of "Every one wants to live at the expense of the state.
They forget that the state counts to live at the expense of everyone"
Frederic Bastiat 1801-1850 which is the essay for the 2010 Sir John W. Templeton
Fellowship.)
In fact, it would lead to more of a participatory democracy.
And, from a participatory democracy approach, feminist, green and Catholic
Social Thinkers also advocating more earmarking with specific voting for
each category or type of expenditure.
Way back in 1963, Mueller surveyed individuals whether the government
should spend more on various programs. Separately, they
survry whether more should spent on the same programs, "even if taxes must
be raises." The latter had a dramatic decrease in expenditures.
Help for older people dropped by half from 70 percent to 34 percent
Highways dropped from 29 to 10 percent. We see the same thing in
health care today 67% of Americans said that everyone should
have at least some health insurance yet 64% are opposed to a tax penalty.
James Q. Wilson and Edward Banfield looked at
votes for spending in municipalities. Both low and high-income people
voted for public spending--the middle income group tended to vote against taxes
and spending.
Tax Knowledge
People's Knowledge of their taxes is somewhat limited. When asked what
they paid in their tax, seventy percent can name a number within twenty-five
percent of their true liability.
Of course, now people would have better access.
I would propose that they bring up their Turbo Tax or whatever
tax program they use when they vote.
Researchers found that lower-income tax payers tended to overestimate
the bite from taxation.
A study in Germany found that people had even less of a knowledge of excise
taxes. And a study in Britain found that the public had a very poor knowledge
of how much was spent by the government on each area and overestimated
the percentage of government
paid by
user fees, e. g. Medicare Recipient's pay some copays as well as some of
the cost of Medicare Part B. How much of the total Medicare expenditures
do these fees cover?
Fiscal Constitutionalism
Dr. Buchanan talks about fiscal constitutionalism, the tendency to keep the
same tax mechanisms. One would not expect country A to tax by property
taxes and a VAT tax in 2010 and then switch to a personal income tax and an
income tax in 2011 and then switch again in 2012. The rates may change,
and of course, loopholes and "tax expenditures" or new credits will
be added from year to year.
Thus, there are two levels of choices in participatory democracy. A
month-to-month or year-to-year choice on the levels of things: should
the income tax rate on those earning $70,000 to $80,000 be fifteen percent
or eighteen percent, should a retiree on social security under
these circumstances earn $13,000.00 per year or $13,473.00 per year? And there might be bigger choices when a country
is being formed--should we have an income tax at all, how should the
big decisons be made. How do we structure a participatory
democracy Constitutional Convention?
Equal Preference Models
Chapter Eleven, particular its appendix, looks at Duncan Black's Committee
models . Assume a bunch of people are voting on a tax rate or expenditure
rate. Proposals to change tax or expenditure rate are accepted or rejected
based on a majority basis.
Duncan Black showed that the tax rate would tend to be the
median of the preferred rate for each of the voters assuming that the preferences were single peaked.
How can we ensure that the voters would not change their relative positions
based upon a proporational distribution. Buchanan
shows that the rate of increase from the tax be enough to outweight
the income distribution. Individuals earning more would probably want
more of the public good, let's say education or public support of culture.
A good tax system would not make a higher income person more likely to
vote for a higher tax for culture relative to a lower income person than
they would be under a general system.
Proportional Taxation Over Time and Excise Taxation
Are excise taxes better than income taxes? Are progressive income taxes
better than a proportional or flat tax.
Dr. Buchanan looks at an individual who expects a different income
at one time than another, e. g., less income during retirement or
more income
Or what about the individual who is uncertaint of how much they will
make, e. g. a business owner in a cyclical feel.
Classical Economists view a tax on a specific product as a distortion as
individuals will change their choices of which goods to buy independent
of the purchase. (I saw this argument in my Intermediate
Economics textbook "The Deadweight Loss of Excise Taxation" in
Edward K. Browning and Mark A. Zupan, MicroEconomics 8/e, page 273 to 275)
They would argue that an excise tax or consumption tax might create
distortions while an income or direct tax would less. Alternatives
are
-
lump-sum payment (like a poll tax)
-
Proportional income tax
-
A Progresive tax
-
A general consumption tax
-
or excise taxes
But, individuals expenditure needs are different
over time; they might need to spend
more some years on necessities in some years. An excise tax is a better
method in this case as the taxation could fall heavier on luxuries
(he terms these "residual needs")
than on things that whose expenditures are likely to vary such
as college education for children or medical care. But, of course,
the American taxation system does allow us to save for our children's education,
our retirement and gives a deduction for medical taxes.
And to some extent, the
sortition based consumption tax does this,
as each item is taxed not only on its badness but whether it is a
basic good or a luxury. In other words, the tax rate on fine wines
and caviar is higher than that on healthy food staples.
Of course this is true because individuals pay more interest than the
government does.
Now, let us look at intertemporal distribution. Individuals can always
lend to the government at the government rate--they can buy treasury
bills. However, if they need to borrow, they will pay more interest.
In this situation, a person woudl prefer a proportional rate when
they expect their income to vary more than their spending.
To be looked at for for Future Thoughtful Thursdays
-
Duncan Black The Theory of Committees and Elections
Cambridge: Cambridge University Press 1958
-
James Q. Wilson and Edward C. Banfield " Voting Behavior on Municipal Public
Expenditures"
in the Public Economy of Urban Communities edited by J. Margolis, 1965,
also
"Public-regardingness as a Value Premise in Voting Behavior"
American Political Science Review
LVIII December 1964, 876 to 887.
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James H. Buchanan, "Public Choice: The Origins and
Development of a Research Program"
