LEVIATHAN, TAXES

AND

THE GEESE WHY DO WE NEED A TAX CONSTITUTION?

Prof. Dr. CAN AKTAN http://www.canaktan.org

PRESENTATION OUTLINE

• LEVIATHAN

“Leviathan: good or evil?

“Does it protect or exploit us?

• TAXES and the GEESE

“How (and why) does Leviathan plucks the

geese?

• TAX CONSTITUTION

“How can the geese be protected from being

plucked?

LEVIATHAN

The GOOD LEVIATHAN

Leviathan in preserving human liberty

and in providing security for its people…

…human life in a “state of nature” is “solitary, poor, nasty, brutish, and short.”

Therefore, a Leviathan (absolute authority of a

sovereign) is necessary to protect the individuals… People need to make a

social contract and establish the Leviathan to

keep peace and order.

THOMAS HOBBES

1588-1679

THE EVIL LEVIATHAN

•The result of an

unlimited and absolute

government is

explotation and abuse..

•Hobbesian unlimited

government is not the

one that protects our

liberties.

THE EVIL LEVIATHAN

Taking = Taxing

BAD LEVIATHAN

Taking = Taxing

The power to “tax”

is simply

the power to “take”.

Unlimited Government and

“Legalized Robbery”

• Unlimited government acts as a robber...

• In order to finance its increasing

expenditures, government may have to levy

new taxes or increase the current tax rates...

• Therefore, unlimited taxation is a legalized

robbery...

“Too much tax is self-robbery in that it does not nurture the

strength of the people to pay the tax.”

Old Chinese Saying

“Collecting more taxes than is absolutely necessary is legalized

robbery.”

Calvin Coolidge

TAXES

and

GEESE

Leviathan and the Geese

“The art of taxation

consists in so plucking

the goose as to obtain the

largest possible amount

of feathers with the

smallest possible amount

of hissing.”

Jean Babtiste Colbert,

1664.

the Geese: ready to be plucked!..

A story from Aesop’s Fables

“One day a farmer, going to the nest of

his goose, discovered a golden egg,

and every morning to his delight he

found another egg of pure gold. He

soon became rich by selling his

golden eggs. As he grew rich he grew

greedy; and thinking to get at once all

the gold the goose could give, he

killed it and opened it only to find-

NOTHING.”

Aesop’s Fables

THE COST OF

EXCESSIVE

TAXATION

Exorbitant taxes... destroy industry

“Exorbitant taxes... destroy

industry bu producing

despair; ...they raise the

wages of the laborer and the

manufacturer, and heighten

the price of all

commodities.”

David Hume

a wisdom and a vision

Adam Smith

“High taxes, sometimes by

diminishing the consumption of

the taxed commodities and

sometimes by encouraging

smuggling, frequently afford a

smaller revenue to government

than what might be drawn from

more moderate taxes... the

remedy is the lowering taxes.”

high taxes: a suicide

“Excessive taxation is

a kind of suicide,

whether upon objects

of necessity, or upon

these of luxury.”

Jean Babtiste Say

What we learned from

history…

Those who ignore the history…

If you read the history you will see how Leviathan exploited the people to have more tax revenues.. Unfortunately, heavy taxes did not increase the welfare of the people at all. By contrast, heavy taxes destroyed the industry and the economy as a whole.

Tax power has always been abused by benevolent despots throughout the history. Do not forget that even the guillotine were used by many taxmen for those who refuse to pay unfair and heavy taxes.

tax history was the

same almost

everywhere:

EXPLOITATION ....

CRUELTY....

What we learned from

theory…

Lessons from the studies

on Public Finance

What we learned from theory...

• High taxes have negative effects on

consumption, investment, saving and

work effort.

• High taxes hinder economic growth

and development.

• High taxes result in losses of

government revenues.

Taxes: A Cost-Benefit Analysis

TA

X R

EV

EN

UE

S

CRITERIA FOR A GOOD TAX SYSTEM

Zero Tax Privileges

Equality under the Law

Neutral Effect on Saving

Neutral Effect on Investment

Neutral Effect on Work Effort

Certanity

Visibility

Clarity

Cost Efficiency

Administrative Efficiency

Effectiveness

Predictability

Binding

Constancy

Horizontal Equity

Vertical Equity

Equality under the Law

EFFICIENCY

GENERALITY

EQUITY

NEUTRALITY STABILITY

SIMPLICITY

A WRONG PRINCIPLE:

ADEQUACY

• An adequate tax system raises enough funds to

sustain the level of public services demanded by

citizens and policy makers.

• An adequate tax must respond to economic growth

by growing itself. This responsiveness to economic

growth is called elasticity. An elastic tax system is

one in which tax revenue increases more quickly

than the economy during times of growth.

FALSE ARGUMENTS:

A WRONG PRINCIPLE:

FLEXIBILITY

…a good tax is one whose revenues demonstrate

flexibility…

“CHANGES IN ECONOMIC CIRCUMSTANCES

REQUIRE CHANGES IN TAX RATES”

JOSEPH STIGLITZ

FALSE ARGUMENTS:

Kaynak: Joseph E. Stiglitz, Economics of the Public Sector, New York, W.W. Norton, 1986.

What is good tax system?

• Good tax rules /optimal criteria

• Constraints

CRITERIA FOR A GOOD TAX SYSTEM

Zero Tax Privileges

Equality under the Law

Neutral Effect on Saving

Neutral Effect on Investment

Neutral Effect on Work Effort

Certanity

Visibility

Clarity

Cost Efficiency

Administrative Efficiency

Effectiveness

Predictability

Binding

Constancy

Horizontal Equity

Vertical Equity

Equality under the Law

EFFICIENCY

GENERALITY

EQUITY

NEUTRALITY STABILITY

SIMPLICITY

• What is to prevent government from

taking the value created by individuals?

• How can government be limited from

the arbitrary “taking” of citizens’

property and income?

• How can individuals be protected from

tax abuse and exploitation?

Some Important Questions?

Current Electoral Democracies…

• There are no effective constitutional

or statutory limits on the aggregate

power of government to tax in most of

the current electoral democracies.

Protecting the geese from being plucked…

TAX CONSTITUTION

-Why do we need a tax constitution?

-Why should we impose constitutional tax limits?

-Is tax constitution a solution for tax exploitation?

-How should a tax constitution be designed?

-What are the major tax constitution proposals?

-What are the major barriers to implement a tax

constitution?

TAX CONSTITUTION Why do we need a tax constitution:?

Why should we impose constitutional tax limits?

Why are tax constraints necessary?

• Majoritarian democracy did not provide sufficient

protections against excessive taxation. The tax

history proved that democracy can not protect

individuals from tax exploitation. Electoral

competition exercises limited control on tax abuse.

Competitive electoral politics is insufficient to

keep the fiscal powers of government within

bounds.

The Advantages of a Tax Constitution

• Tax constitution is a crucial ingredient in generating predictability in economy and finally result in long term economic growth.

• Predictability can be secured by rules only.

• Rules provide stability and regularity in actor’s behaviour.

PREDICTIBILITY

The Advantages of a Tax Constitution

• Frequent changes in the tax law destroy the tax system and make it worse. In other worse, frequent tax reform may result in deformation.

• There is an old saying that “... an old tax is a good tax.” This was an ancient wisdom that focused on the stability of the rules.

STABILITY

The Advantages of a Tax Constitution

• The rent seeking effort would be reduced if tax system is designed at the constitutional level.

• Year-to-year legislation increase the rent seeking efforts, which are socially wasteful.

REDUCING RENT SEEKING ACTIVITIES

How can the power of government be

kept under control?

• If the electoral politics of modern democracies are not the guarantor of taxpayers against tax exploitation, what should we do?

• What are the rules and procedures to limit the power of government?

PRECEDURAL CONSTRAINTS

• Qualified majority rule

• Generality rule

• Simultaneous consideration of

spending and taxation

• Balanced Budget

• Fiscal Decentralization

Qualified Majority Rule

• The first type of procedural

constraints is to require special

majorities for taxes. A constitutional

requirement could stipulate two-

thirds, three-fourths or five-sixths

majorities to levy a new tax or

increase the current tax rates.

Generality Principle

…generality as opposed to

particularity principle can be

secured in the constitution.

A constitutional uniform flat tax is

an example.

Simultaneous Consideration of

Spending and Taxation

K.Wicksell was the first public finance scholar who suggested:

At the parliament, spending and taxation proposal may be discussed and approved at the same time. This may control the excessive spending and excessive taxation.

Balanced Budget

A constitutional balanced budget

requirement is also a device to limit

the taxes indirectly.

Balanced budget is an important reform

to get rid of government’s fiscal

irresponsibility.

Fiscal Decentralization

If effective and enforcable means of

seperating the power of the central

government and the state governments

can be constitutionally defined, the

taxing-spending authority is necessarily

limited.

QUANTITATIVE

CONSTITUTIONAL CONSTRAINTS

• Imposing Maximum Rate Limits on

Specific Taxes

• Tax Revenues as a Percentage of

GNP or GDP

• Tax Base Constraints

Imposing Maximum Rate Limits on

Specific Taxes

• The maximum tax rates can be

determined in the constitution.

Tax Revenues as a Percentage of

GNP or GDP

• This ratio-type of porposal might be

effective to limit the taxes.

Tax Base Constraints

• An indirect way to restrict

revenues and outlays is by

constitutionally limiting

allowable bases for taxation.

• We should first understand the

cost of unlimited government..

• Taxpayers-citizens support for

constitutional reform is

essential…

• A genuine “constitutional

wisdom” is required…

Is Tax Constitution Possible to Implement?

Prof.Dr.Coşkun Can Aktan

Social Sciences Research Society

http://www.sobiad.org

& Dokuz Eylul University, Turkey

http://www.canaktan.org

WHY DO WE NEED A TAX CONSTITUTION?