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School of Economics University of East Anglia Norwich NR4 7TJ, United Kingdom. Choosing how one’s tax payments are spent: a small step towards voluntary taxation Robert Sugden February 2007.

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School of Economics

University of East Anglia

Norwich NR4 7TJ, United Kingdom

Choosing how one’s tax payments are spent:

a small step towards voluntary taxation

Robert Sugden

February 2007


This paper tries to re-launch an idea from a paper of 1990 (which few people apart from Shepley Orr have read):

Robert Sugden, ‘Rules for choosing among public goods: a contractarian approach’, Constitutional Political Economy, 1990.

The issue: how to decide which public goods are supplied, and how this is financed. Note: concern is with public goods, not with all activities of government.

Basic idea: proportional spending:

tax-raising decisions are separated from tax-spending decisions;

tax revenue is distributed between public goods in proportion to individuals’ ‘votes’ ...

... rather than as the outcome of a centralised collective decision.

The idea has several variants; my main interest is in distribution of revenue in proportion to tax contributions (‘tax proportionality’).


Plan of presentation:

1. Some examples of existing or proposed institutions which approximate to proportional spending.

2. Analysis of these examples, bringing out general features of proportional spending and its variant forms, including tax proportionality.

3. The case for tax proportionality as a principle of mutual advantage: the analogy of market provision of private goods.

4. Tax proportionality as a principle of mutual advantage for public goods.

5. Am I serious? Some practical issues.

6. Conclusion: tax proportionality as a way of thinking about the role of government in the provision of public goods.


Example 1: tax relief and matching grants for charities

Tax offset: for each unit of contribution to a charity, the donor pays r less tax (r = tax offset).

Tax relief: if the marginal tax rate is t, each unit of contribution gives a tax offset of t.

Matching grant: for each unit of private contribution, the government makes a matching grant of m. So a donor can increase the charity’s income by 1 + m by contributing 1, i.e. can increase the charity’s income by 1 by contributing 1/(1 + m). This is equivalent to a tax offset of m/(1 + m).

Thus: tax-financed grants to charities are proportional to individuals’ voluntary contributions (gift proportionality). These grants are not governed by collective judgements about the relative worth of different charities.


Example 2: church tax

(Variants of this in Germany, Austria, Switzerland, Denmark, Sweden, Finland; I outline the German system.)

As a taxpayer, you declare your religious affiliation (or none). Then you pay a church tax (levied on your taxable income) to your church. The government collects and distributes the tax (charging the church for collection expenses).

You can avoid the tax by making a formal declaration of not belonging to any church – but social sanctions against this (and you may not be allowed to use a church for marriages, funerals, etc).

Thus, there is state support for churches, but this is not governed by collective judgements about the relative worth of different churches. Transfers to churches are proportional to individuals’ tax payments (tax proportionality).


Example 3: state support for political parties, based on votes

I describe the German system; similar system has been proposed for Britain.

Tax-financed grants to parties, roughly proportional to votes received in most recent elections. (German system has a threshold of 0.5% of vote in federal elections, 1% in Länder elections.)

Thus, state support for parties, but no collective judgements about the relative worth of different parties. Grants are proportional to the number of citizens who support each party (citizen proportionality).

Citizen proportionality reflects idea that parties are a component of democracy, and in democracy, all citizens count equally. (Compare ‘one person one vote’, and prohibition of markets in votes.)


Example 4: Green Paper voucher proposal

(Green Paper on the Future of Democracy in Europe: produced by expert working group for Council of Europe; endorsed by the Power Inquiry in Britain.)

Proposal for state support for political parties, ‘interest associations’ and ‘social movements’ (= organisations of civil society). Each citizen is given equal value of vouchers to allocate between organisations; these determine tax-financed grants.

Claimed advantage over vote-based grants to parties: citizens can direct finance to the parties they genuinely support, while voting tactically (e.g. for parties likely to form governments).

State support for civil society organisations, but no collective judgements about the relative worth of different organisations. Grants are proportional to individuals’ voucher allocations (another version of citizen proportionality).


Example 5: Landfill Tax in UK

Landfill Tax paid by businesses and local authorities per tonne of waste sent to landfill. Note special problem of acceptability: the tax corrects an externality, but gives a windfall gain to government. So liable to be seen as a ‘stealth tax’.

Landfill Tax Credit Scheme: a taxpayer can donate up to 6% of its tax liability to approved non-profit ‘environmental bodies’ (criteria for approval favour projects close to landfill sites). Donations get 90% tax offset.

This is very close to tax proportionality, i.e. grants to environmental bodies in proportion to corresponding tax payments (it would be tax proportionality if the offset was 100%).


Analysis of these examples

In all cases, tax revenue is distributed between public goods/ organisations in proportion to individuals’ choices about how to ‘spend’ their ‘budgets’.

Compare proportional representation: with n voters and m seats in an assembly, each voter is entitled to m/n representatives; STV rules (as explained by Carl Andrae, Thomas Hare and John Stuart Mill) simulate rational bargaining by voters about how to spend these budgets.


Some virtues of proportional spending rules:

1. Avoiding (or reducing) the free-rider and hold-out problems. Individuals make decisions about the allocation of tax revenue between public goods, but tax payments are compulsory.

2. Decentralisation. No collective judgements about relative value of different spending proposals; thus, minority tastes can be accommodated.

3. Participation. Each individual has an input into the overall allocation of tax revenue. Spending organisations have to attract individual support.

4. Individual hypothecation (in the case of tax proportionality). Each individual decides how his/her own taxes are spent, i.e. hypothecation by taxpayer (rather than by expenditure heading).

All of these contribute to ...


Tax morale (i.e. acceptance of obligation to pay taxes; cooperation with tax authorities; political support for taxes) fostered by:

1. Assurance that others won’t free-ride.

2. Individual participation in spending decisions.

3. Transparent linkage of tax payments to specific spending (with tax proportionality).

4. Creation of interest groups in favour of taxation (e.g. Landfill Tax Credits generate support for Landfill Tax from environmental organisations).

5. Recipient organisations treat ‘their’ taxpayers as voluntary donors, so taxpayers receive psychological rewards.


Distributional implications

Citizen proportionality promotes specific egalitarianism (i.e. equality in a specific domain, e.g. civil society).

Tax proportionality promotes mutual advantage (i.e. respects individuals’ pre-tax endowments by allowing individuals limited control over these endowments, even after they have been paid as tax).

I now focus on tax proportionality...


Mutual advantage in the provision of private goods: an analogy

(Crucial to assimilate public-good provision to private-good provision, not to collective judgements.)

A private good is consumed by individuals (or households) separately; it has positive net value to each consumer and zero net value to others.

Markets in private goods realise gains from trade. Normative defence of this takes pre-trade entitlements as given. Questions about justice of entitlements (i.e. opportunities in general) are bracketed.

On this account, markets are not justified synoptically (i.e. as ‘viewed from nowhere’ [Nagel]); they are justified to each individual separately as furthering his/her interests, as she perceives them (the contractarian perspective).


Some implications of the mutual-advantage defence of markets:

1. Not a legitimate criticism that richer individuals get more and better goods – this is an inevitable feature of mutual advantage, given initial entitlements.

2. Paternalistic and perfectionist criticisms are off-limits: the market allows each individual to pursue his/her own interests and ideals, as she perceives them. (E.g. Some people spend a lot on pursuing excellence [knowledge, athletic achievement, artistic achievement, fitness, ... ] while others spend only on pleasure. Is this unfair on the excellence-seekers? Contractarian answer: No.)


Mutual advantage in the provision of public goods

I define a public good as one which is consumed jointly by a set of individuals (its clientele). It has positive net value to each member of the clientele, zero net value to others.

Note: some goods are neither ‘private’ nor ‘public’, e.g. goods which have positive value for some people, negative for others. My analysis is restricted to public goods.

Wicksell’s principle (‘A new principle of just taxation’, 1896): public-good provision should be based on mutual advantage, i.e. realisation of gains from multilateral trade, taking initial entitlements as given.

Thus, in principle, tax/spending proposals should require unanimous approval.


Wicksell’s concrete proposal:

constitutional rule that proposals for public-good provision must be linked to specific proposals for tax finance;

and ‘approximate unanimity’ as the decision rule.

This idea later adapted by Buchanan and Tullock. (They recognise trade-off between the principle of unanimity as a guarantee of mutual advantage and the ‘transaction costs’ of the unanimity rule, e.g. through hold-out and free-riding threats.)

(Buchanan and Tullock, The Calculus of Consent, 1962; Buchanan, The Demand and Supply of Public Goods, 1968)

My proposal tries to implement Wicksell’s principle in a different way...


My proposal:

1. Decisions about tax rates (for public-good spending) are separated from decisions about which public goods to supply.

2. Tax-rate decisions made collectively. This rules out individual choice about overall tax/spending levels (which Wicksell wanted), but disarms free-rider and hold-out threats.

3. Each individual allocates his/her own tax payments between public goods as he/she chooses.


Answering some objections of principle

1. ‘Rich people get more and better public goods than poor people’.

Yes, just as they get more and better private goods, and pay more for them. This is mutual advantage.

2. ‘Some people make bad judgements about which public goods promote their well-being’.

In a contractarian approach, the business of the collectivity is not to judge what is good for people, but to allow them to promote their interests as they perceive them.


3. ‘Some forms of public spending (perhaps on heritage, arts, nature conservation, foreign aid ... ) are morally required – it’s unfair that the costs fall only on people who declare willingness to pay’.

This may be unfair from the viewpoint of those who take that moral position... but not from the viewpoint of those who don’t! Don’t assume that your morality will get majority support. (Compare ‘excellence’ in private goods.)

The idealistic ‘obligations’ of a state to its ‘mission’, to the future, etc., can be left out of account. If such tasks fail to rally the whole nation, their chances of fulfilment are always poor. And those classes of people who have such state activities most at heart, should back their faith with deeds in the field of taxation as well, lest doubts be cast on the disinterestedness of their aspirations. -- Wicksell


Am I serious? Some practical problems

Coordination problem. How can individuals ensure that the overall distribution of spending between public goods satisfies their preferences? E.g. what if no one ‘votes’ for roads, expecting other people to do so?

Some answers:

1. The proportional spending rule can be refined so that ‘surplus’ payments are redistributed (compare STV).

2. Role for intermediary organisations (e.g. general-purpose charitable funds) which can then negotiate with one another.

3. The spending rule can be reformulated for representative democracy, i.e. each representative controls the budget of those who voted for him; then representatives can negotiate.


Rent-seeking problem. Organisations which receive funds will waste resources in competing for ‘votes’.

Some answers:

1. These ‘wasteful’ activities may provide information to citizens.

2. They provide psychological rewards which maintain tax morale.

3. As in response to rent-seeking by political parties, there can be regulations which restrict expenditure on soliciting contributions.


But as a practical proposal: start on a small scale.

Some areas in which proportional spending rules might be tried:

1. Civic associations and political parties – areas in which the coordination problem is less acute, and the case for state neutrality is very strong.

2. Charities which promote moral ideals that are not universally shared – e.g. animal welfare, third world projects, welfare of ex-offenders.

3. ‘Luxury’ public goods (of the kind supported by showy philanthropists and the UK National Lottery) – e.g. new art galleries, museums, opera houses, restoration of monuments, nature reserves, athletic tracks.

How to define the class of potential recipients of funds? We may need some quango to interpret general rules, but the process would have a lot less discretion (and be a lot fairer!) than the ‘distributing bodies’ of the National Lottery Distribution Fund.


But most important message: we can think about public-good decisions in a new way.

The provision of public goods does not require collective value judgements by the whole community – just agreement by those who will pay.

The taxing powers of the state should be used to facilitate mutually advantageous projects of all groups – majorities and minorities.