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In public choice theory, tax choice, or taxpayer sovereignty, is the argument that taxpayers should have a greater say in how their individual taxes are allocated. This theory, which is based on the benefit principle, applies the same concepts of consumer choice theory to taxpayers. Tax choice studies have shown that allowing taxpayers to directly allocate even a small percentage of their taxes can increase their level of satisfaction.

History

For most of recorded history the power of the purse had been exclusively controlled by kings/emperors. Their control over taxes/tributes derived its legitimacy on the basis of divine authority. This authority was severely challenged in 1215 by the Magna Carta.

To guard against despotic royal rule, parliament sought to limit the kings’ powers to impose taxes so as to curtail their ability to maintain a standing army beyond times of war and immediate external threat - The evolution of parliament's power of the purse.

After the power of the purse was transferred to parliament, parliament itself had its authority challenged:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. - Adam Smith, Theory of Moral Sentiments (1759)

Nearly 100 years later after Smith's challenge, Frédéric Bastiat made the following challenge to parliament:

Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority. - Frédéric Bastiat, The Law (1850)

Not too long afterwards, the challenge to parliament was continued by Herbert Spencer:

When that "divinity" which "doth hedge a king," and which in our day has left a glamour around the body inheriting his power, has quite died away - when it begins to be seen clearly that, in a popularly-governed nation, the government is simply a committee of management; it will also be seen that this committee of management has no intrinsic authority. The inevitable conclusion will be that its authority is given by those appointing it; and has just such bounds as they choose to impose. Along with this will go the further conclusion that the laws it passes are not in themselves sacred; but that whatever sacredness they have, is entirely due to the ethical sanction - an ethical sanction which, as we find, is derivable from the laws of human life as carried on under social conditions. And there will come the corollary that when they have not this ethical sanction they have no sacredness, and may be rightly challenged.
The function of Liberalism in the past was that of putting a limit to the powers of kings. The function of true Liberalism in the future will be that of putting a limit to the powers of Parliaments - Herbert Spencer, Man Versus The State (1884)

Freedom of choice

The freedom of choice concept is central to the idea of giving taxpayers more control over how their taxes are spent. Here are two passages which highlight the importance of choice...

As indicated by the emergence of the taxpayers' revolt and concerns for inflation, America is entering an era of economic conservatism. The citizentry is asserting that taxpayers must have a choice in the services provided, that these services should reflect their priorities, and that reasonable value is expected for tax dollars. For educators, these "new" values reflect a demand for taxpayer sovereignty, greater choice among educational programs, and more responsiveness on the part of educational systems. Daniel J. Brown, The Case For Tax-Target Plans
I find that some members of the Liberal Party accept the Collectivist position, and I am disturbed by it. It implies a pronounced lack of faith, not only in free enterprise subject to antimonopoly control but also in the 'Middle way', i.e. the encouragement of non-profit making institutions such as educational trusts, housing and hospital associations. ...I do not suggest, and have never suggested that education and housing should be turned over to free enterprise. What I would like to see is greater diversity in the provision of these services, whether public or private, so that there is a genuine possibility of choice for ordinary citizens. - Alan Peacock, The Welfare Society

Revealing preferences

Compulsory taxation solves the free-rider problem, but it does not solve the preference revelation problem...

Whereas the income received for providing a private good conveys information about the demand for that good, taxes collected under the threat of coercion say little about the demand for a public good or service. Payment of taxes indicates only that taxpayers prefer paying taxes to going to jail. Little or no information is revealed about user preferences for goods procured with tax-supported expenditures. As a consequence, the organization of collective consumption units will need to create alternative mechanisms to prices for articulating and aggregating demands into collective choices reflecting individuals' preferences for a quantity and/or quality of public goods or services. - Vincent Ostrom, Elinor Ostrom

In the absence of people's demonstrated preferences for public goods, governments are likely to inefficiently allocate public funds. Tax choice would allow taxpayers to consider the opportunity costs of their tax allocation decisions.

If the individual can make separate fiscal choices for each public-goods program, which a structure of earmarked taxes conceptually allows him to do, directly or indirectly, he is informed as to the alternatives that he confronts, at least to the extent that the payment institutions allow, and subject, of course, to all of the qualifications noted in previous analysis. The uncertainty that he faces is clearly less than that which is present in the comparable decision on a “bundle” of public goods or services, with the mix among the separate components in the bundle to be determined in a separate decision process or through the auspices of a delegated budget-making authority. If this mix is not announced in advance to the voter-taxpayer, he must try to predict the outcome of another decision process, in which he may or may not participate, a process that need not exist at all in the more straightforward earmarking model where all revenue sources are specifically dedicated. - James M. Buchanan

The opportunity cost valuations of taxpayers would integrate decentralized knowledge, which could help ensure that there was an optimal supply of public goods. In essence, tax choice would create a market for public goods and taxpayers would have the option to shop for themselves in the public sector. There would be a dynamic and mutually influential relationship between the supply and demand of public goods.

Several studies have indicated that allowing taxpayers to allocate their taxes according to their preferences can increase their willingness to pay taxes...

We find that allowing earmarks more than doubles both contributions and the likelihood of giving to government organizations. Participants give on average $1.68 from a $20 initial payment for general purposes, compared to $5.52 for cancer research and $4.04 for disaster relief; the likelihood of giving increases from 30 percent for general purposes to 66 percent for cancer research and 61 percent for disaster relief. - Do Earmarks Increase Giving to Government?

Concentrated benefits and diffuse costs

"Concentrated benefits and diffuse costs" is the label that is used within the political economic community to refer to the distributive consequences of rational ignorance. Rational ignorance is the negative externality of taxpayers having a vanishingly small say over how their taxes are spent. Tax choice, by giving taxpayers more of a say how their taxes are spent, would reduce, if not eliminate, the problem of benefits being concentrated and costs being widely dispersed. This is because taxpayers, rather than spending other people's money, would be spending their own money which is why they would have an incentive to ensure that the benefits of government programs were greater than the costs.

In the private sector, the voluntary sector of the economy, we know that something is "well worth the money" if people are willing to spend their own money on it. In government, politicians work to separate the payment of taxes from the receipt of specific services. We're not asked "will you pay $100 right now for farm subsidies and $4000 for Medicaid and $1600 for the wars in Iraq and Afghanistan and $130 for a new presidential helicopter and ... ?"
If we did get such a question, we might well decide that lots of government programs were not "well worth the money" to the people who would be paying the money. - David Boaz, Well Worth the Money

The Opportunity Costs of War

Tax choice would allow each and every taxpayer to consider the opportunity costs of war. For example, a taxpayer who gave more of his tax dollars to the Department of Defense would have less tax dollars to give to public healthcare. Civic crowdfunding would help ensure that the actual priorities of a nation would determine the most beneficial balance of government spending.

Here are two very different perspectives on the subject of guns versus butter. Here is Adolf Hitler's perspective on the opportunity costs of war...

However well balanced the general pattern of a nation's life ought to be, there must at particular times be certain disturbances of the balance at the expense of other less vital tasks. If we do not succeed in bringing the German army as rapidly as possible to the rank of premier army in the world...then Germany will be lost! - Adolf Hitler, 1936

Here is Dwight Eisenhower's perspective on the opportunity costs of war...

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron...Is there no other way the world may live? - Dwight D. Eisenhower, 1953

Here's Daniel Brown's answer to the question raised by Eisenhower...

Each taxpayer could be contributing to a community which would become more reflective of the kind of world in which he or she would like to live. Gaudeat Emptor! - Daniel J. Brown, The Case For Tax-Target Plans

In popular culture

In 1983 a short science fiction story by Jack C. Haldeman II, We, The People, was published in ANALOG. The plot of the story involves people directly allocating their taxes.

"We, the People," written in a flush of bitter anger, but with an undertone of hope -- has over the years gathered me more response than anything else I've ever written. It has appeared in a variety of newsletters from such diverse organizations as Libertarians and CPAs. I was told that someone once sent copies to all the members of the Senate when they were considering tax reform. It has been used in classrooms to teach the critical difference between a Democracy and a Republic. I wrote it years ago, but I feel it is as pertinent today as it was when it appeared in Analog magazine. - Jack C. Haldeman II, Political Science Fiction

In 2009 Pope Benedict XVI endorsed tax choice in his book Charity in Truth:

One possible approach to development aid would be to apply effectively what is known as fiscal subsidiarity, allowing citizens to decide how to allocate a portion of the taxes they pay to the State. Provided it does not degenerate into the promotion of special interests, this can help to stimulate forms of welfare solidarity from below, with obvious benefits in the area of solidarity for development as well. - Pope Benedict XVI, Charity in Truth

See also

References

  1. Democracy Journal
  2. Do Earmarks Increase Giving to Government?
  3. Science Direct)
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