Cut leviathan’s hunger for tax

There have been many tributes to the life and career of James Buchanan (a selection can be found here, here, here and here), all richly justified, in my view, given the substantial intellectual contributions Buchanan made to classical liberal political economy.

One strand of Buchanan’s intellectual menu which, in my view, hasn’t received appropriate reflective attention over the past week were his many contributions to the theory of federalism. To perhaps rectify this gap a little, an opinion piece of mine was published today in The Australian newspaper (subcription required for online viewing). I identify three key elements of Buchanan’s federalist theories (radical fiscal decentralisation, secession, fiscal equalisation), and relate these issues to the contemporary Australian debates on federalism. With regard to the latter, I have this to say:

Given our emaciated federalism, in which the federal government keeps the power of the purse and runs policy roughshod over the service-delivering states, calls to allocate at least the most important governmental functions to Canberra regrettably have widespread, albeit superficial, appeal.

But instead of surrendering everything of consequence to the likes of the Gillard government, Australia should take a leaf out of James Buchanan’s book and decentralise, placing the centres of political powers and responsibilities as close to the people as possible.

 On a quick final note if I had a little more space I would’ve referred, in some way, to two additional matters: (a) Buchanan saw intimate links between the economics of decentralised public sector taxing, regulating and spending arrangements and the maintenance of liberty more generally; and (b) on a more technical note, in Buchanan’s 1950 paper he pointed out that fiscal equalisation between geographically monopolistic state/local governments were strictly a “second best” solution in the presence of informational compexities concerning calculation of the “fiscal residuum” among individuals.

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28 Responses to Cut leviathan’s hunger for tax

  1. Pedro

    Yes, and it is the decentralisation of taxation that is by far the most important element as the lack of money will always constrain the demand to do something.

    One indication of the modern view of the States is the stupid claim that minerals belong to all australians.

  2. Token

    I could hear the heads popping across the inner luvvie suburbs as the Brahmin class read your article.

    Limited government’s ability to expand? Have you no shame?

  3. NoFixedAddress

    Thank you Julie.

    And we need 2 more states, formal repudiation of UN agreements that never seem to get voted upon by the electorate and sell Tasmania to the highest bidder.

  4. John Mc

    And we need 2 more states, formal repudiation of UN agreements that never seem to get voted upon by the electorate and sell Tasmania to the highest bidder.

    Couldn’t agree more, but I’d keep Tasmania and it wouldn’t get any handouts. It would become an awesome little backwater.

  5. Jim Rose

    Buchanan changed his mind in a sense in Politics by Principle, Not Interest: Towards Nondiscriminatory Democracy with Roger Congleton

    Buchanan at one time used to be for inefficient tax systems because they do not raise as much revenue. Efficient taxes make it easier for governments to extract more revenue from the population with less resistance.

    Buchanan moved on to a generality norm as a constitutional principle: governments impose uniform regulation and use flat taxes on uniform tax bases to fund an equal-per-head demo-grant to replace all existing government transfers. That could lead to a very large government as a share of GDP.

    To quote Politics by Principle, Not Interest: Towards Nondiscriminatory Democracy:

    Policy arguments in support of free, open, and nondiscriminatory trade; flatter and more uniform taxation; nonparticularized standards for environmental regulation and public-goods provision; devolution of political authority to more adequately defined areas of special benefits and against means testing for transfers–indeed against discriminatory treatment of any sort–these arguments find common philosophical grounding in the rule or norm for political generality. (p. 199)

  6. .

    Could Jim, but what us most likely?

    Also, there is no guarantee of keeping inefficient taxes without a constitutional rule.

    I think a better rule to have is a TABOR/spending cap.

  7. Julie Novak

    Hi Jim – Yes, agree with you that Buchanan trained his attentions, from 1993 or thereabouts, on the question of policy generality as a means to counter the fiscal discrimination that is rife within our majoritarian democracies.

    My inclination is that I’m not in support of the idea (would rather prefer no government in non-protective, non-productive realms of activities), but putting that aside, one risk identified by others is that the implementation of generality in fiscal settings would be accompanied by an explosion in government size.

    An interesting paper in the Constitutional Political Economy journal suggested that one way to resolve this problem would be to maintain a government size-to-GDP cap. I don’t recall Buchanan and Congleton going that far in their book.

    As for the other comment about TABOR, I would like to see state/local politicians seriously engage in experiments to discover the most effective fiscal rules. The current policy guidelines and legislative provisions concerning fiscal responsibility just doesn’t cut it, if you look at the yawning budget gaps and debts afflicting most states.

    So, yes, I’m definitely a fan of TABOR, at least as a concept.

  8. Pedro

    “An interesting paper in the Constitutional Political Economy journal suggested that one way to resolve this problem would be to maintain a government size-to-GDP cap.”

    How’d they propose doing that? V-hard to set policy to achieve an outcome visible only with hindsight.

  9. Nuke Gray

    I prefer Confederation, like the Swiss practice. A Confederation of Australia would have lots of strong local governments, weak state governments, and a puny Canberran Conference Chamber.
    Preferably, you would be able to choose to be a citizen, or just a civilian. A citizen would do some form of community service (i.e. militia training, fire brigade, road patrols, etc.) for eleven months of the year, and then have a month being a part of the local government. If we did need permanent public servants, they could be composed of medal-winners of local contests. I think of this as time-share government.

  10. .

    Nuke

    I like the idea of Federal, but not necessarily areas of national importance (i.e defence and external affairs), being negotiated by treaty by the states.

    With no or a limited referral power.

  11. Pedro

    “Preferably, you would be able to choose to be a citizen, or just a civilian. A citizen would do some form of community service (i.e. militia training, fire brigade, road patrols, etc.) for eleven months of the year, and then have a month being a part of the local government.”

    Perhaps you missed Smith’s point that contributions to society occur through working, trade and business and not just doing stuff for the government.

  12. I’m curious. What if the states had to issue their own currency? Perhaps if it was an internal currency not to be used OS?
    Any thoughts?

  13. Nuke Gray

    Pedro, I got the point, but I wondered how we could ensure that governments stay small. If we shared all government functions between us, then concentrations of power couldn’t occur. And as we’d be using up our own time, we’d likely get government over and done with as quickly as possible. This is one way to eliminate parties and professional politicians. I also think we could have automatic seniority- the eldest citizens automatically become the Mayor, etc.

  14. Pedro

    Winston, I’m sure that Sinclair or someone could point you to work on optimal currency areas and I suspect the States ain’t, especially in a federation like ours. IIR, Krugman has had a few articles on this question over the last little while because of the Euro problems, about which he is a skeptic, if that helps.

    Nuke, I don’t think you can unless the constitution is tight and is honestly interpreted. I think a constitutional limit to the gross level of taxation is problematic for the reason I gave above. But other limits to taxation could be effective, like prohibiting progressive taxation.

  15. Borisgodunov

    Nuke,have Provincial governments ,run by unpaid (expenses only)people elected for 4 years then not eligible to be elected again for 20years ,Nationally representatives elected for the same term and conditions as the provincialsone representative for each 50,000voters ,the state wouldvpay their existing super to continue it untill their term expired,then no further perks from the state,all PS departments would be spread around the country ,Parliament would use the old state offices and hold meetings in public halls with citizens allowedvto participate ,criticise and force Referenda on important expenditures .No UN laws allowed and withdrawal of membership ofvthat communist criminal organisation.

  16. Rabz

    But instead of surrendering everything of consequence to the likes of the Gillard government, Australia should take a leaf out of James Buchanan’s book and decentralise, placing the centres of political powers and responsibilities as close to the people as possible.

    This is where we have an almost ready made structure in place, although more states are necessary to assist with the greater devolution of government and the decentralisation of power.

    Governments, state and local, should be encouraged to compete for business and people.

    I’m a recent convert to this philosophy, having been more in favour of removing/emasculating the middle tier of government.

    However, the dullard gubberment has been a salutory example of everything is wrong with a power/policy grab by a central gubberment. I’m also a great fan of what Newman is up to in Queensland.

    Fatty O’Barrell and Dud Flailieu? Not so much.

  17. Trent

    The Swiss example is confederal but it also includes unbundled, non-territorial governance (functional federalism, as per Casella and Frey).

    Unfortunately Australian federalism is so far out of sync with ‘best practice’ it is not funny. It is really as if we don’t understand the concept. It would seem to me a reasonably uncontroversial idea to decentralise (or, “right size”) government functions to their optimal scale, but my impression is that this would be heaped with scorn if it were every attempted.

    Going back to theory land: each function has an optimal scale that must be determined on a case-by-case basis. Anything else will be suboptimal. In other words, there is no viable alternative to polycentric governance.

    Things get even more interesting when you consider that the “governments” (or let’s say “public enterprises”) providing these services could/should actually be functionally-specialised and unbundled, and need not be territorially-bound. Then you could have a system of non-territorial, parallel, competitive governance.

    Both Buchanan and his much under-appreciated collaborator Gordon Tullock have written about how such a system would resemble a sort of “public enterprise complex”. But of course, in Australia it seems that we can’t even grasp the basics of traditional federalism, let alone something as future as this.

  18. Pedro

    “Unfortunately Australian federalism is so far out of sync with ‘best practice’ it is not funny.”

    Just what was best practice in 1890 to 1901? That’s when we got our federation.

  19. Trent

    Good point. But I would have thought the theory of federalism has progressed in the last century or so. Conversely, you might say that Australian federalism was in fact stronger in its original form but has eroded through time. Either way, when the central government is meddling in so many sub-national government responsibilities it is a perversion of the federalist principle.

  20. Pedro

    No doubt we could do it better now, in theory, but good luck with those constitutional changes. I think the High Ct has white-anted the constitution quite a bit, Dams case anyone, and expanded it, Harvester for instance, but I guess the biggest blow was the centralisation of income tax.

  21. Skuter

    This is where we have an almost ready made structure in place, although more states are necessary to assist with the greater devolution of government and the decentralisation of power.

    Governments, state and local, should be encouraged to compete for business and people.

    I’m a recent convert to this philosophy, having been more in favour of removing/emasculating the middle tier of government.

    However, the dullard gubberment has been a salutory example of everything is wrong with a power/policy grab by a central gubberment. I’m also a great fan of what Newman is up to in Queensland.

    Fatty O’Barrell and Dud Flailieu? Not so much.

    I agree with all of the above Rabz…the MRRT is probably the best and most visible (or should that be invisible???), but certainly not the only example of what is wrong with centralisation…

  22. .

    I’d also give regions or even towns the choice to operate as a “provincial” Government with combined state and local powers or the state/shire model like now.

    What works for Tasmania doesn’t necessarily work for a new state say, of New England or Riverina, and that may not work for WA.

    You could even have areas that choose to be unincorporated in a state, or choose to be Federal territories. You might have a Federal City of Townsville, for example, where they would be a Federal territory but with their own local Government.

    At the same time I like subsidiarity, for policing as well, but have a strong aversion to the highly fragmented and overlapping Federal policing/national security/inter-jurisdictional mess the US has. Arguably it contributed to the 9/11 attacks.

    If some bright spark could show us how to streamline security/policing/sherrifs/prison guards and engender subsidiarity, I’d think it was probably a great idea.

    Do you go for subsidarity with command rank based on population, a national law enforcement agenda and have local authorities on permament “silent” secondment/”deputisation”?

  23. Jim Rose

    thanks Julie, When I read his and Congleton’s book, which is not an easy read, it becomes more and more difficult to understand how his system would work.

    The demo-grant would imply a very tax take to fund it. Buchanan did not care about this as long as there was non-discrimination.

    My observation is federalism in parliamentary system of government is a good constraint on the size of government.

    Tax and regulatory powers and public ownership are spread over different levels of the federation, with different parties in power at various levels at the same time, all worried about losing office by going to far away from what the majority wants.

    The will of the people is constantly tested and measured in a federal system with elections at one level or another every year.

    In a unitary unicameral parliament, those crazies to the right or left of you are tempered by an occasional general election only every 3 to 5 years.

    Little wonder that UK Labor reconsidered devolution, an assembly for London, and regional government after 15 years of Maggie Thatcher, good and hard.

    Unfettered power loses its shine when it must be shared with your political opponents at least once a decade.

    Too many policies and ideas of the Left assumed that they are the face of the future, rather than just another political party that will hold power as often as not.

  24. “Couldn’t agree more, but I’d keep Tasmania and it wouldn’t get any handouts. It would become an awesome little backwater.”

    Whaddya mean, “become”?

  25. Boambee John

    At the moment we have six states, each with 12 senators, plus two senators for each federal territory. To keep the nexus between the Senate and the Reps, new states should reduce the numbers of senators for each state, not increase the total in the Reps.

    Divide Australia into new states as follows: Nth Qld/Capricornia (capital Townsville); Sth-West Qld (capital Toowoomba); Sunshine Coast/Brisbane/Ipswich/Gold Coast, extended to Ballina; New England/Nth-East NSW, capital Tamworth or Armidale; Newcastle/Sydney/Wollongoing (NSW as we cynically call it); Riverina, rest of current NSW, plus most of the ACT and the south bank of the Murray, capital Canberra; Victoria from Geelong/Ballarat/Bendigo east; rest of Victoria plus Sth Aust, capital Adelaide; Tasmania; West Aust from Geraldton south; and rest of WA plus NT, capital Darwin.

    This gives eleven states, allow six senators each, saving a few senators and twice that many MHRs, or seven senators each, with unequal half senate elections. This would give a wider diffusion of power.

    Financially, give the GST and business tax to the Commonwealth, plus a universal flat rate income tax, with states to levy an additional income tax over the Commonwealth one, at a progressive or flat rate depending on the decision of the local government.

    Any takers?

  26. NoFixedAddress

    If we cut off subsidizing states then 400,000 people would leave Tasmania.

    It is a mendicant State… it is a failed State.

  27. J.H.

    Off topic but on the economic subject…. Daniel Hannan makes an excellent speech in defence of Capitalism at the Oxford Union.

    I like listening to that guy. A very eloquent man.

  28. .

    Boambee

    All excellent and eminently sensible ideas.

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