School of Economics

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School of Economics University of East
Anglia Norwich NR4 7TJ, United Kingdom
Choosing how ones tax payments are spent a
small step towards voluntary taxation Robert
Sugden February 2007
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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).
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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.
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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
charitys income by 1 m by contributing 1, i.e.
can increase the charitys 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.
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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).
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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.)
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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).
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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).
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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.
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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 ...
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Tax morale (i.e. acceptance of obligation to pay
taxes cooperation with tax authorities
political support for taxes) fostered by
1. Assurance that others wont 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.
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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...
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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).
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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.)
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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.
Wicksells 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.
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Wicksells 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 Wicksells
principle in a different way...
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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.
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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.
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3. Some forms of public spending (perhaps on
heritage, arts, nature conservation, foreign aid
... ) are morally required its 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 dont! Dont 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
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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.
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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.
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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.
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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.
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Thank you for listening!
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