October 26, 2011

PIGOVIAN BEFORE IT WAS COOL:

The Case Against Direct Taxation: Part One (Lawrence Hunter, 10/21/11, Forbes)

In Federalist #22, Alexander Hamilton articulates succinctly the theory of fiscal discipline on which the original design of the U.S. Constitution rested.  Here Hamilton is discussing the fiscal constraints inherent in the taxing authority granted to the national government:

    It is a signal advantage of taxes on articles of consumption [what today are called tariffs and sales and excise taxes] that they contain in their own nature a security against excess.  They prescribe their own limit, which cannot be exceeded without defeating the end proposed--that is, an extension of the revenue [Art Laffer, call your office].  When applied to this object, the saying is as just as it is witty that, 'in political arithmetic, two and two do not always make four'.  If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds [Congress, pay attention].  This forms a complete barrier against any material oppression of the citizens by taxes of this class [i.e., indirect taxes], and is itself a natural limitation of the power of imposing them.

    Impositions of this kind usually fall under the denomination of indirect taxes, and must for a long time constitute the chief part of the revenue raised in this country (Federalist #22).

Hamilton's exposition in Federalist #22 illustrates the sophistication of the theory of political economy that informed the original constitutional design, which gave rise to a constitutional pincer holding the national government firmly in check.  History has borne out the Framers' expectations that taxes on consumption are to a large degree self-limiting, while direct taxes know far fewer limits.  In the case of the original Federal design, the self-limiting tendency of indirect taxes on consumption augmented the other arm of the constitutional pincer--limiting the national government solely to the exercise of delegated powers--to make unnecessary other specific constitutional limitations on the national government's taxing and spending authority, i.e., explicit taxing, spending and borrowing limitations.

Posted by at October 26, 2011 6:52 AM
  

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