Leviathan, Taxes And The Geese

1. LEVIATHAN, TAXES
AND
THE GEESE
WHY DO WE NEED A TAX CONSTITUTION?
Prof. Dr. CAN AKTAN
http://www.canaktan.org

2. 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?

3. LEVIATHAN

4. The GOOD LEVIATHAN
Leviathan in preserving human liberty
and in providing security for its people…

5. …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

6. 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.

7. THE EVIL LEVIATHAN
Taking = Taxing

8. BAD LEVIATHAN
Taking = Taxing
The power to “tax”
is simply
the power to “take”.

9. 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...

10. “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

11. TAXES
and
GEESE

12. 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.

13. the Geese: ready to be plucked!..

14. 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

15. THE COST OF
EXCESSIVE
TAXATION

16. 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

17. 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.”

18. high taxes: a suicide
“Excessive taxation is
a kind of suicide,
whether upon objects
of necessity, or upon
these of luxury.”
Jean Babtiste Say

19. What we learned from
history…

20. 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.

21. tax history was the
same almost
everywhere:
EXPLOITATION ....
CRUELTY....

22. What we learned from
theory…
Lessons from the studies
on Public Finance

23. 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.

24. Taxes: A Cost-Benefit Analysis
TAXREVENUES

25. 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
GENERALITYEQUITY
NEUTRALITY
STABILITY
SIMPLICITY

26. 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:

27. 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.

28. What is good tax system?
• Good tax rules /optimal criteria
• Constraints

29. 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
GENERALITYEQUITY
NEUTRALITY
STABILITY
SIMPLICITY

30. • 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?

31. 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.

32. 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?

33. 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.

34. 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

35. 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

36. 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

37. 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?

38. PRECEDURAL CONSTRAINTS
• Qualified majority rule
• Generality rule
• Simultaneous consideration of
spending and taxation
• Balanced Budget
• Fiscal Decentralization

39. 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.

40. Generality Principle
…generality as opposed to
particularity principle can be
secured in the constitution.
A constitutional uniform flat tax is
an example.

41. 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.

42. 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.

43. 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.

44. QUANTITATIVE
CONSTITUTIONAL CONSTRAINTS
• Imposing Maximum Rate Limits on
Specific Taxes
• Tax Revenues as a Percentage of
GNP or GDP
• Tax Base Constraints

45. Imposing Maximum Rate Limits on
Specific Taxes
• The maximum tax rates can be
determined in the constitution.

46. Tax Revenues as a Percentage of
GNP or GDP
• This ratio-type of porposal might be
effective to limit the taxes.

47. Tax Base Constraints
• An indirect way to restrict
revenues and outlays is by
constitutionally limiting
allowable bases for taxation.

48. • 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?

49. 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?