Towards a Catallactic Approach to Taxing and Spending

David J. Hebert

Advisor: Richard E Wagner, PhD, Department of Economics

Committee Members: Peter J. Boettke, Donald J. Boudreaux

Enterprise Hall, #318
July 21, 2014, 10:00 AM to 07:00 AM


Why are tax policies around the world long, complicated, and rife with loopholes despite virtually universal agreement that a shorter, simpler tax code with fewer loopholes would be preferred? Traditional explanations, which are implicitly grounded in a choice-theoretic framework, are unable to provide an answer to this question. This dissertation seeks to provide an alternative, rules-based approach to answering this question and ultimately to answering the question of how taxation and appropriation policies are created.

After an introductory chapter, chapter two identifies two broad strands of fiscal theorizing which date back to the late 19th century in the persons of Knut Wicksell (1896) and Francis Edgeworth (1897). From Edgeworth descends the treatment of public finance as a branch of applied statecraft, as conveyed these days largely through notions of optimal taxation. From Wicksell descends the treatment of public finance as offering explanations for observed patterns of collective activity. These two branches are not so much antagonistic as they are non-commensurable. The explanatory branch, moreover, is underdeveloped in comparison with the hortatory branch, and this paper seeks to sketch some contours for an explanatory theory of collective activity, paying particular attention to the American fiscal context.

Chapter three recognizes that economists have addressed the effect of taxes on a polity, who then using their findings to justify the implementation of various tax schemes. These theories are loosely based on the ideas of fiscal philosophers from the end of the 19th century, with recent work demonstrating the efficiency gains of optimal taxation theory. These fiscal philosophers, however, almost universally neglect to discuss the implementation of their proposed policies, implicitly believing that politicians will do what is good once they are aware of what is good. Differences in policies among democracies (or differences in the timing of the passage of similar policies), therefore, becomes an explanation of differences in the median voter, which is no different from making a preference-based argument. While plausible, this type of explanation is analytically unsatisfactory. I argue that differing legislative outcomes (of kind or timing) are the result of a difference between the rules the governing body is bound by when proposing and passing legislation. In doing so, this paper pushes back on the preference-based explanation that is prevalent in recent work on comparative public policy and argues instead that the rules of the game matter.

Chapter four seeks to provide a sketch of a micro-level explanation of public finance. De Marco (1936) and Buchanan (1949) provide initial starting points for understanding this view of public finance, which was subsequently extended by Wagner (1992,2007) and Yoon (2000), among others. While these scholars focus on the ''fiscal commons'' created by communal property rights within public sectors, this paper focuses on the power to tax and provide public goods. Building off of Hebert & Wagner (2014), this paper provides a catallactic explanation of taxation and provision of public goods within the individualistic state, where the state is represented as the sum of its individual members acting in a collective capacity. A concluding chapter, which provides remarks of the project as a whole and its implications for future research and policy, follows.