The Public Choice Approach to Tax Reform

Abstract

The public choice approach to tax reform involves a number of distinguishable strands. In the first place, there is a strand in which there is posited a view that taxes emerge, like all other public decisions, from political processes and, therefore, are to be explained in terms of the characteristics of political institutions. In the second place, there is a strand in which it is conceived that taxes are part of the institutional structure, in some way logically prior to other policy choices. One element in this strand is the ‘cost-share’ perspective, in which taxes are seen as analogous to the prices that voters pay for public services. On this view, changes in tax arrangements by altering those prices can be expected to alter public expenditure levels. An alternative element is the ‘Leviathan’ perspective, in which taxes represent the fiscal powers of the state, and in which changes in tax arrangements will alter the extent of these powers and thereby the extent of state expenditure activities. In both these latter perspectives, taxes are to be treated quasi-constitutionally: The institutional arrangements under which tax reforms are decided become an important object of attention. Furthermore, the feedback effects of tax changes on expenditure levels become an explicit part of any proper analysis.

These various strands are discussed in this paper, and the question is posed as to whether the public choice approach, in whatever variant, can be satisfactorily and coherently ‘tacked on’ to a more orthodox tax-reform line.