Fiscal Choices and Economic Outcomes
Chapter 7: A Constitutional Approach to Taxes and Transfers
The general pattern revealed by the cases presented in the prior chapters is that the conditions and ﬁscal rules that increase average net income usually reduce transfer payments and median net income. In the common but irritating parlance of the contemporary political debate, there seems to be an inherent trade-oﬀ between “equity and eﬃciency.” This phrase is irritating (at least to me) because it equates equity with a more equal distribution of income, whether the result of a consensual or a coercive process; by this standard, most burglaries and robberies are equitable. At issue is whether ﬁscal redistribution should be considered as a politically organized taking by a lower-income majority or a politically organized giving by a higher income majority coalition. The model of democracy developed in the prior chapters implies that ﬁscal redistribution is a taking by a lower-income majority. This chapter explores the conditions for which some amount of ﬁscal redistribution would have broad approval at the constitutional stage.1 In this sense, this chapter presents an extension of the model of optimal government to address the eﬀects of risk aversion on ﬁscal choices and economic outcomes. What are the characteristics of a “fair” system of taxes and transfers? All too often, contemporary political discussion of taxes and transfers uses a concept of fairness that provides little basis for agreement. A proposed change in taxes or transfers is usually considered fair only when it beneﬁts one’s own group or some other group that one favors, whether...
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