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Although coercion is a fundamental and unavoidable part of our social lives, economists have not offered an integrated analysis of its role in the public economy. The essays in this book focus on coercion arising from the operation of the fiscal system, a major part of the public sector. Collective choices on fiscal matters emerge from and have all the essential characteristics of social interaction, including the necessity to force unwanted actions on some citizens. This was recognized in an older tradition in public finance which can still serve as a starting point for modern work. The contributors to the volume recognize this tradition, but add to it by using contemporary frameworks to study a set of related issues concerning fiscal coercion and economic welfare. These issues range from the compatibility of an open access society with the original Wicksellian vision to the productivity of coercion in experimental games.
Abstract - Omission of collective choice prevents the analyst from understanding the central role of political equilibrium. To create a framework that places tax policies in a broader equilibrium context we must model the underlying collective allocation mechanism and use it as a starting point, whether we do empirical work explaining observed features of tax systems or whether we engage in research on tax efficiency. A broader perspective of this nature also forces us to re-examine well-known concepts, such as tax expenditures, flat taxation, and the marginal efficiency cost of public funds, and to question and reinterpret some of the conclusions that have been reached in the literature related to these concepts.
Omission of collective choice analysis causes us to miss a concept that is fundamental to the understanding of taxation, namely, political equilibrium. Outcomes in the public sector are a consequence of the balancing of political forces taking place in the context of resource use in both the private and the public economy. If this is acknowledged, we must create an explicit link between collective choice mechanisms describing political equilibrium and the determination of tax policies.
We show in this paper how the perspective on tax research is changed if such a broader approach is adopted. We start by considering collective allocation mechanisms that can serve as a basis for positive tax analysis. This is followed by a discussion of how an explicit acknowledgment of political equilibrium affects the normative evaluation of tax systems and tax policy proposals.
The problem of efficiency, however, is so vital that we cannot ignore it merely because our answers to it are not complete. Welfare economics, despite its limitations, provides partial answers; and I feel that to provide partial answers to vital problems is at least as important as it is to provide complete answers to lesser questions.
Tibor Scitovsky (1951, p. xi)
This chapter represents an exploration of a more inclusive welfare economics of taxation. Its nature, like that of any new enterprise, is of necessity somewhat tentative. The emphasis is on presenting an outline of ideas and illustrating them with relevant examples. Whereas some sections develop a formal analysis, others take a more intuitive approach. The organization of the material is based on the conclusions reached in the preceding chapter, where we sketched three steps required for a comprehensive welfare analysis in the presence of collective choice. (See Section 5.3.)
We begin here with the selection of the standard of reference against which to judge collective choice outcomes. This, together with a consideration of the conditions under which equilibrium policy outcomes will achieve the standard, constitutes the first step. Economists have devoted much effort to working out such an analysis for an economy with private markets, and it has been one of the important achievements of the discipline to show that an economic system with competitive markets will yield optimal (Pareto-efficient) outcomes under carefully defined conditions.