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Autocratic, Democratic, and Optimal Government

Fiscal Choices and Economic Outcomes

William A. Niskanen

This book presents simple models of the major alternative types of political regimes, estimates of the parameters of these models, and quantitative estimates of the fiscal choices and economic outcomes of these regimes. William Niskanen provides valuable analysis of the effects of the voting rule, the progressivity of the tax structure, and the length of the fiscal horizon in democratic governments and interesting insights of the effects of alternative regimes on policies, such as war and immigration, that affect the number of people subject to the regime.
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Chapter 7: A Constitutional Approach to Taxes and Transfers

William A. Niskanen


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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