The basic puzzle about the power to tax is how to limit the capacity of government to exploit taxpayers, while at the same time not overly hampering the government in going about its useful activities. Standard economics fondly believes that it is giving advice to benevolent despots as to how to collect a given target of tax revenue at the least possible harm to the size of the economic pie. The Constitutional Political Economy approach of Geoff Brennan and Jim Buchanan showed that that very same advice is exactly what the non-benevolent government wants to hear in its efforts to maximise tax revenue. Brennan and Buchanan were concerned about excessive exploitation of taxpayers in the large; standard economics is concerned with second- order small triangles of economic inefficiency; government is concerned about the size of first-order revenue rectangles: and so should we be.
'Good intentions will always be pleaded, for every assumption of authority. It is hardly too strong to say that the Constitution was made to guard the people against the dangers of good intentions. There are men in all ages who mean to govern well, but they mean to govern. They promise to be good masters, but they mean to be masters.'
Daniel Webster, American politician and diplomat (1782-1852)
The standard economic approach to taxation is to give advice to a benevolent despot. Courtesy of a referee, here is what motivates a benevolent government:
A benevolent politician seeks revenue (or a transfer of resources from the private sector) to establish and monitor property rights for the market sector, fund public goods and correct other market failures, and to achieve society's equity goals via direct income transfers, progressive income taxation and the provision of some goods and services at below cost. The benevolent politician/economist, in assessing the scale of taxation and expenditure, seeks to balance the marginal social cost of any tax used with the marginal social benefits of any item of expenditure. The total of taxation is the result of this balancing.
In the standard theory of public finance, the predominant form of benevolence is utilitarian, which involves a trade-off between redistribution and the aggregate size of the economic pie. Less commonly, the standard theory is cast in Paretian terms: the benevolent ruler is only concerned with efficiency with which the revenue target is reached (for example, Battaglini and Coate 2008). When it comes to taxation, in both cases the benevolent politician's objective is to meet a target of tax revenue while doing the minimum harm to the economy. The standard approach worries about the efficiency of the tax system; that is, it is concerned with excess burden triangles.
In 1980, Geoffrey Brennan and James Buchanan published The Power to Tax: Analytical Foundations of a Fiscal Constitution. Their book was directed at the intelligent citizen and not at a benevolent despot. Brennan and Buchanan assumed that the state acted selfishly, and spent on things that the rulers wanted, and not necessarily what the citizen wanted. A monopolist wants to gather in as much revenue as it can for its own purposes. Brennan and Buchanan applied the name 'Leviathan' to a state that did the same - that is, the Leviathan state engrosses as much revenue as it can for its own purposes.
Brennan and Buchanan acknowledged that their Leviathan is not a fully realistic description of government in the developed world - in part, because many countries, including Australia, have constitutional provisions and conventions that constrain the Leviathan-like tendencies of the state. In mainstream economics, these constitutional provisions and conventions are regarded as unfortunate, because they prevent benevolent governments from achieving the best of all possible outcomes for their citizens. In contrast, from the Brennan and Buchanan viewpoint, these constitutional provisions and conventions prevent non-benevolent governments from exploiting their citizenry to the full. …