In the preceding chapter we argued that multiple tax bases, separate rate structures, and a variety of special provisions can be understood as a set of related policy instruments that are shaped and used by the government in the course of its continuing struggle to maintain itself in elected office. In this chapter we explore this idea further, using a model that is more formal than the one presented in Chapter3. The model is also more detailed with respect to individual behavior, allowing for the possibility that voters may reduce their tax liabilities by “self-selecting” their level of work effort in order to alter their tax liabilities. Allowing taxpayers to mimic the behavior of others who face lower tax rates is a way of acknowledging that some characteristics of taxpayers that would be a useful basis for taxation, such as potential work effort or intellectual ability, cannot be directly observed by tax collectors. This means that the government must levy taxes according to surrogate characteristics that are correlated with the basis upon which it would prefer to impose taxes, while allowing for the fact that taxpayers may choose to misrepresent themselves in response to taxation based on these surrogate characteristics.

We begin the study of the power to tax in democratic states with a review of six well-known models that have been used to investigate important aspects of the formation or evolution of tax systems. Five of them include collective choice as an integral part. Johansen's challenge to “go further and to consider the public sector in another way” has not gone unanswered in the fiscal literature during the last four decades. Many authors have attempted to explain how selected aspects of tax systems, or tax structure as a whole, emerge in an equilibrium resulting from the interaction of the private economy and the political process. The major contending frameworks include the median voter model, structure-induced equilibrium, probabilistic voting, the Leviathan model, and cooperative game theory. We provide a sketch of each of these approaches.

Actual tax systems are complicated and often elaborate. Underneath their rather baroque appearance lies a simple skeleton, however, consisting of a limited number of parts. The main elements in all tax systems are tax bases, rate structures, and special provisions such as exemptions, credits, and deductions. A theoretical analysis of tax structure must explain how these elements arise as a result of private and public choices and also what determines their design and importance within the system as a whole.

The foundation of this book derives from two sources. Like most writers concerned with public finance, we rely on traditional microeconomics and general equilibrium analysis to describe the economic decisions of individuals in the private sector. To this, we link formal modeling of collective choice behavior, relying in particular on recent advances in the theory of probabilistic voting. The book examines taxation as it arises on this joint foundation – as a result of the interaction of maximizing decisions in the private and public sectors.

Although the final form of the book reflects our special interests and concerns, we have attempted to present a balanced picture, one that is more comprehensive than commonly found in the literature on taxation that includes elements of collective choice. We examine taxation and tax systems in democratic countries from a positive or predictive point of view, but we also devote considerable space to discussion of efficiency and of normative concerns. In addition, we use applied general equilibrium analysis and statistical research to link theory to empirical data. We feel that taxation as it arises out of democratic choices can best be understood if examined from all these perspectives in relation to an expanded theoretical foundation that incorporates collective choice.

Although the book was written over the past four years, the material reported in several of the chapters evolved over a longer period.

We showed in Chapter 4 that, in a world described by the probabilistic voting model, decision makers choose policies that are economically as well as politically efficient. These policies reflect three essential elements: the demands of voters, differences in their political responses and influence, and the operation and constraints of the private economy.

Taxation has been a major subject of comment and analysis throughout history. It is not difficult to understand the source of this widespread attention. Taxes directly affect the daily lives of individual citizens while also providing “the sinews of state,” as pointed out long ago by the Roman writer Cicero. They give the government access to private economic resources and make possible the provision of essential public services, such as defense, police protection, and the enforcement of property rights through the courts. Their imposition influences the distribution of personal income and may alter the division of wealth among different groups. How a society employs taxation reveals much about the relation between its citizens and the state, and thus defines an important part of the nation's character.

Economists have made many contributions to the study of taxation and fiscal choices. Although our analysis falls into this broad tradition, it also represents a new departure.

The rural South has undergone a remarkable transformation in the last half century. The changes in the physical landscape are immediately apparent: the millions of tenants, sharecroppers, and wage laborers who once raised and picked the South's crops and lived in its tumbledown tarpaper shacks are gone, replaced by machines moving methodically across its fields. But the changes in the social landscape that accompanied these physical changes are no less striking: Gone, too, is the complex system of reciprocal duties and obligations that had bound agricultural employers and their workers, the elaborate but often unspoken protocol of paternalism that shaped much of day-to-day life in the rural South. In this book, we will show how paternalism emerged in the postbellum years to reduce the cost of obtaining, motivating, and retaining labor in cotton production following the abolition of slavery. We will also explore the economic and political transformations caused by the decline of paternalism, changes less visible but no less important than the mechanization of cotton production.

The cost of obtaining labor in Southern agriculture included making sure an adequate supply of laborers could be hired and making sure that the laborers who were hired worked hard at their tasks (reducing the cost of monitoring labor) and stayed on through the harvest (reducing turnover in the farm labor force). We will describe the circumstances that caused the emergence of paternalism as part of an implicit contract between employers and workers that helped solve these problems.

Introduction

The tenacious opposition of the white Southern elite to interference in its dealings with Southern farm labor was, as we have seen, consistent with a desire to maintain a system of paternalistic relations with those workers. As long as the cultivation and harvest of cotton required a large supply of cheap, dependable laborers, landed interests had a strong incentive to prevent or limit both the government programs that would have been seen by workers as substitutes for the benefits offered by planters and the migration of workers out of the South. But, by the 1960s, many of the programs originally opposed by the Southern rural elite had come into being without solid Southern opposition, and millions of farm workers had left for the cities of the South and North. We believe that mechanization of cotton was the major catalyst for bringing about the rapid expansion of the federal welfare state and the massive outmigration from the rural South.

Mechanization and the appearance of accompanying science-based technology reduced the economic incentive to provide paternalism. The advances in science that accompanied mechanization increased and stabilized yields, making the farm-specific knowledge of tenants less valuable. Because labor turnover was no longer as costly, the benefits of supplying paternalism were reduced. Mechanization also directly reduced the costs of labor and generating labor effort. With millions of farm workers displaced, the threat of unemployment was sufficient to generate work intensity. Furthermore, mechanization directly reduced the costs of monitoring labor by standardizing the production process and reducing the variation in the marginal productivity of labor. Paternalism became an outdated contractual device.