National Tax Journal

VOLUME XXVIII, NO. 4 DECEMBER, 1975

PUBLIC FINANCE AND PUBLIC CHOICE

JAMES M. BUCHANAN*

ABSTRACT reflects my own methodological presupposi-

tions. I shall not include reference to the
Public finance has undergone major "theory of fiscal policy," which bloomed
transformation since World War II. This brightly in the early post- Key nesian en-
paper surveys this transformation , par- vironment only to fade somewhat in the
ticularly from a public-choice perspective. face of political realities. The macroeco-
Post-Marshallian public finance had two nomic policy emphasis derived from Keynes
major gaps: the expenditure side of the fiscal is a causal element in the relative growth
accounty and the public decision making of the governmental sector and, as such,
process. Both of these gaps have been par- one source for the increasing attention to
tially filled , although much discussion of "public economics." But there is no direct
policy continues to take place in a now- relationship between this emphasis and the
outmoded setting. Social security financing fundamental paradigm shift that is the pri-
is used as an illustration of the separate mary subject of my treatment in this paper.
methodologies.
"Public finance," as a quasi-independent
subdiscipline in the American academic Post-Marshallian Public Finance
setting, has been substantially transformed
in the thirty years after the ending of I can commence by describing the content
World War II, although heritages of the of "public finance" in post-Marshallian eco-
earlier tradition remain, and notably as nomics, as limited to English-language dis-
these affect practical political discussion. course. Positive analysis was restricted
From its relatively minor role as one among almost exclusively to theories of tax shifting
many fields of applied microeconomic and incidence. And, indeed, as Marshall
theory - akin to industrial organization, himself explicitly recognized,1 the theory of
agricultural economics, or labor economics - tax shifting becomes almost the ideal in-
public finance emerged to become "public strument for applying the principles of com-
economics," which, at least conceptually, is petitive price theory. Comparative statics
on all fours with "private economics," or, offered a plausible predictive framework
more familiarly, the economics of the pri- for analyzing tax alternatives. Within limits,
vate sector. If relative weights are assigned and for certain simple forms, the economist
in accordance with relative shares in GNP, could confidently predict the effects of a tax
"public economics" promises, for better or on the behavior of persons and firms in the
for worse, to grow still more important in private economy, and, through this, on the
decades ahead. aggregate effects on such variables as rela-
My purpose in this survey paper is to dis- tive prices, outputs, profits, and industry
cuss this transformation of "public finance"
structure in particular sectors. For this
from a public choice perspective, one that strictly positive analysis, which could also
yield empirically-refutable propositions, the
economist had no reason to inquire about the
♦Center for Study of Public Choice, Virginia Poly-
political purpose of taxation, no reason to
technic Institute and State University. I am indebted
introduce external evaluation of alternative
to my colleague, Gordon Tullock, for helpful comments.

383
 384 NATIONAL TAX JOURNAL [Vol. XXVIII

tax instruments.2 This subarea of

the expenditure sidepublic
of the fiscalfi-
account.
The necessary
nance, which is essentially interdependence
applied price between
theory, has continuedthe to
two be developed
sides of the public-sector budget
through more sophisticated technical
must be incorporated into any analysis,
even if the purpose
analysis which has now moved beyond is to laythe
down ideal
standards drawn
Marshallian partial-equilibrium from some external scale
framework
to general-equilibrium settings,
of evaluation. including
Secondly, there is the neglect
extensions to open economies.
or oversight ofNo basic decision struc-
the collective
paradigm shift has occurred here,
ture itself. but
The shift this which has
in paradigm
subarea has necessarily been
occurredrelegated to a
involves the incorporation of both
relatively less importantthese elements.
role in the larger
theory of "public économies" which has
emerged.
Alongside this post-Marshallian positive The European Theory of the Public
theory of taxation, there existed what I may
Economy
label as the post-Pigovian normative "the- Following the central contributions of the
ory" of taxation. This unfortunate and some-
early 1870s, the economic theory of markets
what confused discussion stemmed vaguely assumed a unified structure. The simultane-
from the utilitarian philosophical tradition ous operation of productive input and final
and had as its purpose the derivation of product markets accomplished evaluative
normative "principles" for taxation. The allocative, and distributive functions. The
most sophisticated of these, developed most European attempts to extend this aesthet-
fully by Pigou,3 was that of "equi-marginal ically satisfying logic structure to "explain"
sacrifice," which was based on a simplistic the operation of a public as well as a private
application of the calculus in a context of sector now seem to represent predicted
assumed interpersonal utility compara- increments in scientific progress. The puzzle
bility. This normative discussion was much in intellectual history does not concern these
less rigorous intellectually than the positive efforts; the puzzle lies in the long-continued
analysis of tax incidence, and, indeed, the failure of English-language economists to
normative treatment of taxation among make comparable extensions of their basic
English-language economists was almost a framework or to acknowledge an interest in
half-century out of phase from the more the continental efforts.
sophisticated discussion on the European As early as the 1880s, Mazzola, Pan-
continent. The normative "principles" of taleon^ Sax, and De Viti De Marco made
taxation that were seriously discussed may rudimentary efforts to analyze the public
seem bizarre when viewed in a modern
economy within an exchange framework.
post-Wicksellian or public-choice paradigm.Sax and Mazzola discussed the demand side
But these "principles" assume continuing of public goods by identifying collective as
practical importance as soon as we recognizedistinct from private wants. Pantaleoni ex-
that observed institutions of taxation find
tended the marginal calculus to apply to the
their intellectual origins in these norms, legislator who makes choices for both sides
which also, to a large extent, inform modernof the budget. De Viti De Marco explicitly
political criticisms of tax structures, along
constructed a model in which the consumers
with continuing calls for tax reform. Forand the suppliers-producers of public goods
example, the most vocal modern advocatesmake up the same community of persons.4
for reform, notably Joseph Pechman and The most sophisticated contribution was
Stanley Surrey, base their arguments on
made by Knut Wickseil in 1896. 5 He ex-
presupposed norms for the distribution ofplicitly identified the fundamental meth-
tax shares, norms which are derived inde-odological error in the then-orthodox
pendently. approach, and he combined positive crit-
There are two related, but quite distinct, icism with normative suggestions for re-
gaps in the normative public finance of the form. Wicksell recognized the necessity of
post-Marshallian, post-Pigovian tradition. bridging the two sides of the fiscal account,
There is, first, the long-continued, and and he noted the indeterminacy of any pro-
methodologically inadmissable, neglect of posed normative principles that were lim-
 No. 4] PUBLIC FINANCE 385
ited to tax-side considerations. More im- The Transitional Setting
portantly, Wicksell admonished economists
The substantial transformation in Ameri-
for their failure to recognize the elementary
can public finance did not spring full blown
fact that collective or public-sector decisions
emerge from a political process rather fromthan some rediscovery of the European
from the mind of some benevolent despot. theory of the public economy, although it
His suggestions for reform were concen- might legitimately be claimed that this
trated on the institutional structure for theory, appropriately modernized, was suf-
ficiently
fiscal decision-making, on the institutions of complete to have allowed for this
as an alternative intellectual scenario. The
"public choice." The unanimity rule was pre-
sented as the normative benchmark for transformation emerged slowly and in bits
efficiency in public-sector decisions, and
and pieces,
a influenced by several sources
other than the strict analysis of the conti-
clear distinction was made between those
nental scholars. Precedence in presenting
situations where genuine gains-from-trade
the central ideas of what he called the
might emerge and those which involve
"voluntary exchange" theory of the public
zero-sum transfers. Despite the essentially
normative setting for Wicksell's reformeconomy
sug- belongs to R. A. Musgrave who,
gestions, the groundwork was laid in forhis first paper, offered a highly critical
evaluation.8
subsequent positive analysis of political de- However, Musgrave's analysis
cision structures. was not such as to attract independent and
complementary attention to the body of
Subsequent to these early contributions,
work was carried forward, notably in work discussed. And Howard Bowen, in his
Sweden and in Italy. Erik Lindahrs attempt original and much-neglected 1943 paper,
to examine more closely the relationship showed no signs of having been influenced
between standard efficiency norms and the by the European analysis.9 Bowen's paper
combined two elements that were to be more
political bargaining process offered a half-
way house between Wicksell's seminal effort fully developed later as separate strands
and modern analyses of public finance in of analysis, the theory of demand for public
democratic process.6 Lindahl's proposed goods and the theory of voting. Although
solution, the set of so-called Lindahl tax- flawed by minor analytical errors, Bowen's
prices, or Lindahl equilibrium, has come to paper was perhaps neglected because it was
occupy the attention of several sophisticated too much in advance of the analytical mind-
analysts who have attempted to extend the set of its time. My own efforts, in my first
modern theory of general competitive equi- substantive paper in 1949, one that was
librium to include the public sector.7 also largely neglected, were concentrated in
a methodological critique of the post-
The Italian tradition, following the early Pigovian normative framework. In this, I
work by Pantaleoni and De Viti De Marco, was influenced almost exclusively by a
was characterized by an emphasis on the fortuitous discovery of Wicksell's basic
necessary political assumptions required for work. 10
either a positive or normative theory of
the public economy. The Italians devoted Developments of note came rapidly dur-
much more attention to the implications of ing the 1950s and 1960s. These may be dis-
nondemocratic political structures for the cussed initially in terms of their independent
emergence and viability of fiscal institu- emergence, with little or no direct inter-
tions, on both the tax and the expenditure connection one with another and with the
sides, than did their continental counter- corpus of public finance theory. In what
parts. These aspects, in particular, become follows, I shall discuss briefly four lines of
inquiry or analysis: (1) the theory of demand
helpful in the analysis of the supply institu-
tions of the public economy, an analysis for public goods; (2) the theory of voting;
that remains in its formative stages. Apart (3) the theory of constitutions; and (4) the
from these substantive contributions, theory of supply of public goods. In each
Barone and Einaudi, in particular, wereof these, I shall attempt to distinguish posi-
tive and normative elements of analysis.
sharply critical of the naive utilitarian
After these strands are separately exam-
framework of the English-language norma-
tive discussion of tax principles. ined, I shall try to integrate these as they
 386 NATIONAL TAX JOURNAL [Vol. XXVIII

relate to modern public finance theory.

conditions for efficiency. Within Samuel-
Finally, I shall use a single example
son's conceptual to
framework, resort to the
demonstrate* how the modernsocial welfare function for tax-share distri-
public-choice
paradigm in public finance bution
differswas anfrom
implication
the of his unwilling-
ness to close
post-Marshallian, post-Pigovian the model in a manner
paradigm
analogous
which, although conceptually flawed,to the exchange process of the
con-
private
tinues to inform some policy sector. He did not conceive the
discussion.
fiscal process as one of "exchange," even
at the level of abstraction that the formal
The Theory of Demand for Public Goods
statement of the necessary marginal con-
As previously noted, thereditions
werefor efficiency
two gap- required.
Nonetheless,
ing holes in the pre- World War the Samuelson analysis can
II normative
analysis of taxation, a readily
neglectbe interpreted
of the positively, which
expenditure side of the fisc necessarily
and aimplies an exchange framework.
neglect
of the collective decision process. In this case, Modern
the necessary marginal condi-
public finance theory incorporates tions for allocative
both efficiency
of become condi-
tions that must be satisfied for an
these elements, but they remain concep-
tually distinct and they were, equilibrium
to an solution
extent,to the complex "trades"
independently developed. that
An theinternally
political or collective choice process
consistent set of principles embody. One such solution
for efficiency in is the Lindahl
equilibrium,
the public economy may be elaborated with which meets the basic Samuel-
no attention to the politicalson requirements,
decision although it is arbitrarily
process.
This was the framework for Paul A. restricted in its distribution of tax shares
Samuelson's seminal paper in 1954, 11 inframarginally.
in The more general Wick-
which he laid down the necessary marginalsellian approach makes no attempt to
specify particulars of an equilibrium. In-
conditions for allocative efficiency in the
stead
provision of public or collective goods to a this approach concentrates on the
defined community of persons. Samuelson institutions for "trading," and implicitly de-
fines efficiency to be present when all gains-
extended the accepted norms of theoretical
welfare economics from the private to thefrom-trade are exhausted. In a setting of
public sector of the economy, using indi-zero transactions costs, including bargain-
ing costs, unanimous agreement will be
vidual evaluations as the building blocks.
Perhaps his primary contribution lay in possible
his on both marginal tax-share distri-
bution and on the quantity of public goods
rigorous definition of a "collective consump-
tion" good, embodying both complete to be purchased, although the position of
nonexclusion and complete efficiency from agreement will not be unique and its char-
joint consumption, the two acknowledged acteristics will depend strictly on the path
of adjustment. 12
attributes of "publicness." Early criticisms
of the polarity features of Samuelson's
classification were, in my view, misplaced
The Theory of Voting
because this initial step seemed essential
before the further elaboration of taxonomie The Wicksellian paradigm for fiscal ex-
detail could take place. change, ideally operative under a decision
The Samuelson mathematical formulation rule of unanimity without prior constraints
on tax-share distribution, places the "public
of the conditions for public sector efficiency
did not contain a comparable normative economy," methodologically, on all fours
theory of the distribution of tax shares. with the "private economy." The importance
Income-effect feedbacks of tax-shares of this Wicksellian benchmark or starting
on individual evaluations of collective- point for the developments that have fol-
consumption goods were incorporated in the lowed cannot be overestimated. But the
analysis, but the tax-share distribution itself
world is not characterized by zero trans-
actions costs, and these loom especially
was arbitrarily selected by resort to a social
welfare function. This normative construc- large when many persons must agree on
tion is quite different from that which single
is outcomes. The two-party dimension-
required for the definition of the allocative
ality of private-goods training, especially
 No. 4] PUBLIC FINANCE 387

as constrained byHethe discovered that if all individual

presence of pref-numer
alternatives on both sides
erences could of
be arrayed overexchange,
alternatives
lows the costs ofso reaching as to appear as single-peaked,
agreement the t
minimized, and, because of this, to be majority-rule outcome will always be that
largely neglected in analysis. No such ne- which meets the preferences of the median
glect is possible for the complex trading voter in the group. This median- voter con-
process that politics embodies. Necessary struction was to emerge as an important
departures from the idealized models be- tool in the public-choice theory of the 1960s,
come much more apparent, and enter and especially in public-finance applications.
analysis even at the level of institutional Single-peakedness in preferences becomes a
design. Wicksell himself recognized, in his plausible assumption for many fiscal de-
discussion of qualified majorities, that the cision variables.
ideal political constitution could not embody Kenneth Arrow's work exerted far more
a strict unanimity rule, even for the legisla- influence on economic theory generally than
tive assembly. And, of course, historical ex- did the closely-related work of Duncan
perience in democratic politics includes a Black. However, the specific effects on
wide variety of voting and decision rules- public-finance theory are less direct. Arrow
institutions, only a few of which approxi- placed his analysis squarely in the social
mate the unanimity-rule benchmark. welfare function discussion that had

Once the ideal is abandoned, as necessary emerged from theoretical welfare eco-
for the operation of political decision struc- nomics, and he demonstrated that there
tures in accordance with more inclusive existed no collective decision rule for
amalgamating individual preference order-
efficiency norms, what rules for collective
ings into a consistent social or collective
choice should be chosen? Before this ques-
tion can be addressed at all, there must ordering.
be This rigorous generalization of the
cyclical-majority
positive analysis of alternative voting rules phenomenon, along with
and institutions. From a current vantage Arrow's emphasis on the impossibility of
generating a social ordering meeting plau-
point, in 1975, it seems almost incredible
that American public-finance economists sible criteria, had the effect of putting the
analysis of collective decision rules directly
completely ignored analysis of voting rules
prior to World War II, even though they on the research agenda of modern econo-
must have recognized that fiscal outcomesmists. Faced with results that they did
not welcome, and with their somewhat
were related directly to the political struc-
ture. Aside from the paper by Bowen, naive political presuppositions exposed,
noted above, there was no discussioneconomists
of were slowly forced to acknowl-
edge that social welfare functions do not
voting rules prior to the seminal contribu-
exist. Only two alternatives remained open.
tions of Duncan Black and Kenneth Arrow,
in the late 1940s and 1950s.13 They might become public-choice analysts
Black's earlier efforts had been strictlyand examine the operation of alternative
decision rules, no one of which is ideal.
within the post-Marshallian tradition of in-
Or, they might revert to the normative post-
cidence analysis. 14 His reading of the Italian
works was an acknowledged source of his Pigovian stance which requires the explicit
introduction of private and personal value
shift of emphasis to an analysis of voting
standards that bear little or no relationship
rules. Black's major work was largely con-
fined to an analysis of majority rule as to athe decision-determining institutions of
the real world.
means of reaching decisions in collectivities.
In his analysis, which included the discovery
of precursory work by Borda, Condorcet, The Theory of Constitutions (V oting
and most notably, Lewis Carroll, Black Rules)
noted the possibility of the majority cycle,
but his emphasis was placed on the worka- Once positive analysis of the operation of
bility of majority rule rather than the alternative voting rules was placed on the
reverse. This emphasis led him to examine agenda, along with the Wicksellian recogni-
tion that no nonunanimity rule could
restrictions on preference domains that
guarantee efficiency in the narrow sense,
might produce unique majority solutions.
 388 NATIONAL TAX JOURNAL [Vol. XXVIII

the way was open for the among constitutional rules

development ofstemmed, in
a theory of constitutions, based
part, from on of
our neglect anthe supply side of
the public-goods
analysis of the choice among a set of exchange
less- process. The
theory
than-ideal institutions for of demand for
generating public goods, the
collec-
tive outcomes. This was the
theory of setting
voting, and the for
theory of voting
The Calculus of Consent rules
, which I jointly
- each of these lines of inquiry initially
authored with Gordon Tullock,
embodied the and which
implicit assumption that in-
was published in 1962. 15 dividual
This demands
work for public goods, once
carried
these could be articulated
forward the analysis of alternative decision and combined
rules, with emphasis onthrough some collective-choice
the political ex- process,
ternal diseconomies inherent
would bein any less-
efficiently and automatically met.
than-unanimity rule andItonwas the prospects
as if the alternatives for public choice
for vote trading as a means of mitigating
were assumed to be available independently
from
the results of differential some external source;
preference in- there was no
tensities. Our central purpose
problem concerning
was, how-the behavior of the
suppliers
ever, that of analyzing the or producers.
choice among Governments are,
collective decision rules, and of
however, deriving
staffed by persons who make up
criteria for "optimality" only
at this
a subsetconstitu-
of the community, and any
tional level. Our procedure was of
full analysis to shift
fiscal exchange must allow
backwards, to the levelfor
ofdifferences
choice between the behavior of
among
rules, the Wicksellian unanimity persons in producing-supplying
or general roles and in
consensus criterion. The transactions costs consuming-demanding roles.
barrier to general agreement may be fully Precursors of supply-side analysis can, of
acknowledged at the stage of reaching col- course, be found in the Italian theory of
lective decision on specific fiscal (tax andpublic finance in the nondemocratic or
spending) variables. But this need not implymonopolistic state. Models of this political
that persons cannot agree generally on the structure were developed in some detail,
rules or institutions under which subsequentmodels in which some ruling group or class
decisions will be made, whether these be
collects taxes from the masses who are ruled
majority rule or otherwise. To the extentand utilizes the proceeds to its own
that individuals' future preference positions
maximum advantage. But attention was also
are uncertain and unpredictable under sub- paid to the feedback or reaction effects on
sequent operation of the rules to be chosen,
the behavior of those who were exploited.
they may be led to agree on the basis of
At the turn of this century, Puviani de-
general criteria that are unrelated to eco-veloped the interesting and still-relevant
nomic position.16 concept of "fiscal illusion," which he applied
Our analysis was positive in the con-to both the tax and the spending side of the
ceptual sense, and we made few suggestions fiscal account.17 However, aside from my
for institutional reform. Nonetheless, our own summary of some of these elements,
discussion was admittedly informed by awhich I did not sufficiently stress, there was
vision or model of constitutional process no direct linkage between the monopolistic-
that embodied individualistic norms. This state analysis of the Italians and the
vision was, in its turn, used to "explain" emergence of the modern theory of public-
features of existing political structures, fea-
goods supply.
tures which might, with comparable meth-
American scholars have operated within a
odological legitimacy, be "explained" with
continuing presupposition that their own
alternative normative models. Our analysis
political institutions remain basically demo-
of constitutions was not sufficiently com-
cratic. Even within this structure, however,
plete to allow us to discriminate among
the demanders and the suppliers of public
widely varying explanations for the emer-
services must occupy differing economic
gence and existence of observed political
institutions. roles, and the interests of the two groups
need not coincide. The seminal American
The Theory of Supply of Public Goods contribution toward the ultimate develop-
ment of a theory of public-goods supply
This gap in our analysis of the choice was made by Anthony Downs. In his book,
 No. 4] PUBLIC FINANCE 389

An Economic Theory of Democracy

interested committee structure in the legis- , p
lature, fully drain
lished in 1957, Downs off the potential tax-
presented a mod
payers' surplus that might analogous
political party competition be possible from to
competition among public-goods
firms provision. in
Once again,
an itindust
is
with not the particular predictive
vote-maximization serving power of as t
analogue to profit Niskanen' s analysis that is relevant for 18
maximization. our The
dictive power of purposes; Downs' model
what is relevant was shar
is the contrasting
criticized by William setting within
Riker,which the who operations introd
of
a game-theoretic agencies and bureaus may be examined.
framework to suggest
political parties, even when treated as The theory of public-goods supply has not
monolithic decision-taking entities, will seek been fully developed, and efforts to inte-
to organize winning coalitions of minimal grate this theory, as it exists, with the
size rather than to maximize vote totals.19 theory of demand, including the theory of
For purposes of this survey, however, voting the and voting rules, have only com-
central contribution of these efforts laymenced.23
not
in the explanatory potential of the models
themselves but rather in the fundamentally
The Expanded Domain for Positive
different setting offered for viewing Analysis the
activities of governments. Once govern-
ments came to be viewed as collectiv- In the four preceding sections of this
ities of persons who were themselves paper, I have briefly summarized four main
maximizers - whether these persons be lines of inquiry or analysis that have com-
party organizers, political representatives, bined to form the still-emerging subdisci-
elected officials, judges, or bureaucrats - pline of "public choice." 24 My purpose has
the emerging paradigm involving the not been that of describing the substantive
passively-efficient supply response to content of these separate but closely related
public-goods demanders was dramatically bodies of analysis; this would have required
changed in course. further treatment of the specific modern
The Downs- Riker models of interparty contributions in each area.25 My purpose
competition, which have been carried for- has been the more restricted one of sketch-
ward and elaborated in more sophisticated ing with a broad brush the separated strands
forms by other scholars, were paralleled by of public choice theory in order to suggest
the development of a theory of bureaucratic how these have combined to effect the
behavior, both at the level of the individual transformation in public finance theory
member of the hierarchy and that of the during the decades after World War II.
agency or bureau itself. Gordon Tullock Methodologically, the central element in
introduced the maximizing bureaucrat, who this transformation is the dramatic expan-
responds to his own career incentives like sion in the scope or domain for positive
everyone else, and analyzed the implications economic analysis. The subject matter of
of this behavioral model for the control public finance has shifted outward; the
problem faced by those at the top of theeconomist now has before him many more
hierarchy.20 Even on the extreme assump-questions than his counterpart faced a half-
century ago. This expansion in the set of
tion that the agency head desires to meet
opportunities for applying the economists'
the demands for public goods efficiently,
tools, both conceptual and empirical, may be
Tullock's analysis suggests that this objec-
tive could not be met in organizations discussed in terms of specific categories.
requiring personal services.21
William Niskanen boldly challenged the I. The Effects of Alternative Fiscal In-
orthodox conception of bureaucracy by stitutions, Existing and Potential , on the
modeling separate bureaus as budget- Behavior of Persons and Groups in the
maximizing units.22 The implication of hisPrivate Economy. As I have noted earlier,
polar model is that bureaus, acting as this is the only domain for positive economic
monopoly suppliers of public services, and analysis in post-Marshallian public finance.
possessing an ability to control the elected The results of the public-choice transforma-
political leaders through a complex and tion have been to remove this still-important
 390 NATIONAL TAX JOURNAL [Vol. XXVIII

avenue for investigation

that from itsbetween
is constructed place the benefits
of exclusive dominance and to put
or spending sideitof along-
the account and the costs
side other significant andorequally
taxing side. Differing fiscal institutions
legitimate
applications of economic influence
theory. the This
weighing doesof accounts. What
are thethe
not, of course, suggest that implications
theory for of
budgetary size if
shifting and incidence, with
taxes are expenditures
spread more generally than bene-
added to taxes, has been reduced
fits? And vice inversa?
absolute
Quite apart from the
"true" distribution
importance. The hard questions of tax shares and benefit
in incidence
shares, the "perceived"
theory have not all been resolved, and these distribution mat-
will, and should, continue to
ters. command
Fiscal the an impor-
perception becomes
attention of economists. tant and relevant area for positive analysis.
By necessity, "fiscal psychology" merges
II. The Effects of Alternative Fiscal In-
with fiscal economics. The research poten-
stitutions, Existing and Potential , on the
tial for positive analysis seems almost
Behavior of Persons and Groups in the
unlimited, and relatively little has been
Public Economy , in Public Choice. In a done.26
relative sense, however, traditional inci-
dence theory must be reduced in significance
because other questions beckon. If the III. The Effects of Alternative Political
effects of a designated fiscal institution, say or Collective-Choice Institutions , Existing
a specific excise tax, on the behavior of or Potential , on the Behavior of Persons
persons in private markets may be analyzed, and Groups in the Public Economy , in
what is to deter the intellectually curious Public Choice. A closely related, but some-
and competent economist from examining what different agenda for positive analysis
the effects of this tax on the behavior of and one that is more central to what might
persons in "public markets?" If personsbe called "public-choice theory," as such,
pay for public goods through such a tax,involves the choice-making institutions
themselves, as these may be predicted to
might they not be predicted to "purchase"
differing quantities than they would do generate fiscal outcomes. This is the public-
under alternative taxing schemes? Oncefinance application of the theory of voting,
such questions are raised, the need forsummarized above.
answers along with the opportunities for re- What budget characteristics can be pre-
search seem self-evident. An implicit dicted to emerge under simple majority
assumption of invariance in fiscal choice over rule? What differences in size and compo-
widely divergent institutional structuressition might emerge when general-fund
will simply not stand up to scrutiny.
budgeting is compared with separate-
The whole set of questions raised here purpose budgeting, with earmarked tax
stem from the "publicness" of the goods as revenues? What differences in the willing-
these are demanded and consumed and as
ness to issue public debt can be predicted
these are supplied through political or gov-
when the effective voting franchise is
ernmental institutions. Individuals do not
expanded from local property owners to all
pay "prices" for partitionable units of these
members of the local electorate? What will
goods. They pay "taxes," which are coer- be the comparative levels of public outlay
cively imposed upon them through a political
on, say, education, when these services
process, and this coercion is, in turn, made
are provided through a set of monopoly
necessary by the "free rider" motivation school districts and through the market
inherent in general collective action. Fewresponse to educational vouchers provided
persons will voluntarily pay taxes if theydirectly to families? What are the effects of
expect to receive the benefits of generally-
school-district consolidation on budget size?
available public goods. But what quantity What are the effects of franchising bureau-
will persons, when they act collectivelycrats
in on the level and growth of public
public-choice capacities - as voters, actual
spending?
or potential, as members of pressure
These are only a few of the questions that
groups, as elected politicians, as govern-
ment employees - choose to provide andhave
to been, and are being, asked by those
who approach public finance from the gen-
finance? This choice depends on the bridge
 No. 4] PUBLIC FINANCE 391

eral public-choice paradigm.

private As
scale of values, even if the these s
argument
ple questions
suggest, the domain
is couched in quasi-philosophical terms. De- f
positive analysis spite
here Wickseirsincludes
clearly stated admonitions
instituti
analysis at a level where explanatory in 1896, this remains the setting for much of
hypotheses are derived deductively fromthe normative discourse in public finance,
extract models, and also at a level where even in 1975. If the public-choice paradigm
these hypotheses are tested empirically.27 is accepted, however, the assumption of the
benevolent despot cannot accompany nor-
IV. Analysis of the Behavior of Persons mative advice, even at the subconscious
and Groups in the Collective Constitutional level. The economist must recognize that
Choice Among Fiscal Institutions . This collective outcomes emerge from a complex
area for positive analysis is the direct public- political process in which there are many
finance application of the theory of constitu- participants. Almost by necessity, he will
tions, previously summarized. As they may be less willing to devote time and effort
be historically observed, certain fiscal to persuasion here, even though his own
institutions take on quasi-permanent or con-personal convictions about ideal outcomes
stitutional characteristics. For example, may be equally as strong as in the despotic
basic changes in the tax code are discussed paradigm. It should come as no surprise,
as if these are expected to endure over atherefore, that modern public finance is less
sequence of periods. Neither taxes nor characterized by normative advice concern-
spending programs are chosen carte blancheing the "best tax" program and more con-
at the onset of each budgetary period. In- cerned about predicting the effects of
deed one of the primary difficulties in alternatives.
reducing the explosive rate of increase in The public-choice paradigm does, how-
federal outlays in the 1970s is alleged to be ever, allow for a parallel expansion in the
the high proportion of uncontrollable spend- normative realm of discourse. Once it is rec-
ing in the budget. Once the quasi-perma-ognized that fiscal decisions emerge from a
nence of institutions is recognized, thecomplex collective choice process, the
analysis of fiscal choices is modified. Dif- economist may concentrate his normative
fering criteria for choice must be invoked, advice on "improvements" in the process
criteria which may be less directly identified itself. He may, for example, say that direct
with self-interest of persons and groups. taxation is preferred to indirect taxation,
The models which are designed to derivenot because direct taxation is likely to be
hypotheses become different in this context. more or less progressive, but simply because
I shall not attempt to suggest researchdirect taxation leads to a more rational
opportunities that exist in this extension ofchoice calculus among voters and their rep-
positive analysis, one that is perhaps lessresentatives than indirect taxation. Simi-
fully developed than the others. My point larly, he may suggest that withholding, as an
of emphasis in this listing is to indicateinstitution, tends to reduce the rationality of
that at least three areas of actual and poten-the choice process because it tends to make
tial positive analysis now exist over and be- the taxpayer somewhat less conscious of his
yond the severely limited post-Marshalliancosts. These are admittedly normative
field of shifting and incidence. suggestions that emerge from a paradigm of
the political world, one that embodies the
democratic-individualistic standard that
The Modified Domain for Normative
Discussion persons should get what they want so long as
each persons counts for one. This seems a
more secure normative base than that which
The domain for positive analysis in public
finance has been greatly expanded. lays Butdown criteria for choosing among sepa-
what about the domain for normative dis- rate persons and groups, in which one man
must somehow count for more than an-
course? So long as the economist proffers his
advice as if some benevolent despot is other. These comments may, however, re-
listening to him, he may be much more flect my own personal normative biases and
willing to devote his efforts to persuasion I shall not pursue them further in this
based ultimately on his own personal, survey.28
392 NATIONAL TAX JOURNAL [Vol. XXVIII

An Example: The Provision choice

and theorist would suggest that th
Financing of Social Securityholding feature of the employee shar
payroll taxes less influential on b
than
I shall conclude this paper byorthodox
a brief incidence analysis
imply.
discussion of a single example, oneMore
that importantly,
is he would
that
of current importance. I shall the employers' share of payro
demonstrate
that the transformation in even if finance
public ultimately paid by the work
not directly
produced by the public-choice influence the attitu
paradigm
allows different and additionalworkers. The
questions tosuppliers of pensio
authorities
be asked. In the process, policy of the social security ad
discussion
must be improved, independentlytration, ofmay
this have been privatel
or that economist's preferred rational
set of in their early arguments for
norms.
thisof
Consider, first, the application employee-employer
the post- tax separa
Marshallian theory of shiftingThe
and public-choice
incidence, theorist would t
along with the post-Pigovian norms
predict for
the effects of a proposed s
taxation. The social security system isof social security, in
the financing
or in
financed by payroll taxes, and part,
the from earmarked payrol
shifting
and incidence of these, both the
to theemployees'
sources of general-fund fina
and the employers' shares, notably
are properto personal
sub- and corporate i
taxation.
jects for inquiry. These taxes Rudimentary analysis
are, when
viewed in isolation, "regressive,"
suggestand thisthe direct linkage b
that
characteristic leads the post-Pigovian to sides would be seve
tax and benefit
denounce it on normative grounds.
such a change, and that both sets o
tutions
Strictly speaking, this is all that would
public be subjected to wholly
entto
finance might have contributed political criteria. Could pensions
the policy
related
discussion in the methodological to earnings (and contrib
mind-set
under such a change? Could a me
prior to World War II. Straightforward
for benefits
extension of analysis to the other be avoided? Even if the
side of the
budget, quite apart from thestructure does not reflect the op
public-choice
of genuine
extension, would have allowed "insurance" principles, ta
positive
analysis of the effects of voters,
public and their political represen
pension
commitments on the rate of may acquiesce
private saving in its continuance
in the economy.29 Similarly,asthe
theeffects
intergeneration
of transfer
which the
the public pensions on retirement behavior system seems to emb
plausibly
might be analyzed. The normative acceptable. Young work
strictures
enter
arising from the regressivity the payroll
of the system may not worry wh
are toldsome-
tax might also have been tempered that the present value o
obligations
what by the extension of simple exceeds manyfold the p
incidence
value
analysis to the benefits side, of future
where pro- pension benefits pr
that they continue to expect that
gressive elements are significant.
legislatures
The public-choice paradigm will insure a reasona
draws direct
of return on their total contribution
attention to the bridge between the tax
continuing support may depend, h
and the spending side of the account. As
noted earlier, this bridge ison maintaining
influenced by the separation of th
from the government's general fis
perception, and even within the confines
count and also on insuring that s
of payroll-tax analysis, the effects of the
limits are atti-
structural features on voter-politician imposed on departure
tudes become important. In the first place, benefits.
earnings-related
the public-choice analyst wouldThe public-choice
note the ear- economist, to the
that he is
marking features of the financing; willing to make suggesti
payroll
taxes are earmarked for thereform, seems more likely to sugge
social security
tutional
trust fund account. This fact, adjustments designed to
in itself,
against
strongly suggests that these theare
taxes "political bankruptcy
system
viewed differently from other than he is to suggest that the
general-fund
revenue sources. Secondly,taxes
thebe made more progressive. W
public-
 No. 4] PUBLIC FINANCE 393
Theory of Public
the discussion takes the Economy," Quarterly Journal of
form of Eco- positiv
nomics, 53 (February 1938), 213-37.
analysis or normative statement, the public
9 Howard R. Bo wen, "The Interpretation of Voting
choice economist looks on the fiscal process
in the Allocation of Resources," Quarterly Journal of
as a complex exchange, which
Economics, 58 (November 1943), 27-48.must involve
two sides of the account
10 See, my, "The Puresimultaneously
Theory of Government
Those who pay the ultimate
Finance: costs
A Suggested Approach," of publi
Journal of Political
Economy,
goods need not, of LVII (December 1949),be
course, 496-505,identical
reprinted
in my Fiscal Theory and Political Economy, op. cit.,
with those who enjoy
pp. 8-23.
the ultimate benefits
But, in democracies, the intersection be-
I may add here an autobiographical note concerning
tween these two sets must be large, this discovery that will be familiar to my students
especially when the budgets are considered and former colleagues but which may deserve wider
in composite totals and over a sequence ofdissemination. In the summer of 1948, having finished
my dissertation and fresh from having passed the
time periods. Regardless of political struc-
German-language requirement, I spent some weeks
ture, the proportion of the community's
wandering about the stacks in Harper Memorial Library
membership that shares in genuine "fiscal at the University of Chicago. By chance, I picked up
surplus" is related inversely to the sizeWicksell's Finanztheoretische Untersuchungen, a book
and coercive power of the government's that had never been assigned or even so much as men-
tioned in my graduate courses, and, as I later ascer-
police force.
tained, one of the very few copies in the United States.
Quite literally, this book was responsible directly for
FOOTNOTES the paradigm shift that I experienced.
11 Paul A. Samuelson, "The Pure Theory of Public
1 . . there is scarcely any economicExpenditure,"
principle Review of Economics and Statistics,
XXXVI (November
which cannot be aptly illustrated by a discussion of the1954), 387-89.
shifting of the effects of some tax. ..." 12 MyAlfred
book, The Demand and Supply of Public
Marshall, Principles of Economics , 8th Goods (Chicago: Rand McNally, 1968), develops public-
Ed. (London:
Macmillan, 1930), p. 413. goods theory in the Wicksellian framework. The book's
2 Beginning attempts were made totitle is somewhat
extend an misleading; the analysis is almost
analogous positive analysis to the expenditure exclusively devoted
side of to the demand side; the supply
the fiscal ledger (see for example, Earl sideRolph,
is neglected."A
Theory of Excise Subsidies," American 13 Their first papers appeared in 1948 and 1950,
Economic
Review , 42 (September 1952), 515-27). But, respectively. See, Duncan Black, "On the Rationale of
as noted,
the predominant emphasis was, and remains, Group onDecision Making," Journal of Political Economy,
taxa-
tion. LVI (February 1948), 23-34; Kenneth Arrow, "A Dif-
3 A. C. Pigou, A Study in Public Finance (London: ficulty in the Concept of Social Welfare," Journal of
Macmillan, 1928). Political Economy, LVIII (August 1950), 328-46.
4 For a brief summary discussion of the early con- These were followed by their full-length works. See
tinental contributions, see Richard A. Musgrave, The Kenneth J. Arrow, Social Choice and Individual Values
Theory of Public Finance (New York: McGraw Hill, (New York: Wiley, 1951); Duncan Black, The Theory of
1959), pages 68-80. For a more extended discussion Committees and Elections (Cambridge: Cambridge Uni-
which is, however, concentrated largely on the Italian versity Press, 1958).
contributions, see my, Fiscal Theory and Political 14 Duncan Black, The Incidence of Income Taxes
Economy (Chapel Hill: University of North Carolina (London: Macmillan, 1939).
Press, 1960), pages 24-74. For translations of most 15 James M. Buchanan and Gordon Tullock, The
of the important contributions here, see Classics in the Calculus of Consent (Ann Arbor: University of Michi-
Theory of Public Finance , ed. by R. A. Musgrave gan Press, 1962).
and A. T. Peacock (London: Macmillam, 1958). 18 The setting for our analysis has an obvious af-
5 Knut Wickseil, Finanztheoretische Untersuchun- finity to that which is used by John Rawls in his deriva-
gen (Jena: Gustav Fischer, 1896). Major portions of this tion of the principles of justice, a setting that has been
are translated and included in Classics in the Theory of made familiar since the publication of Rawls* treatise
Public Finance, op. cit. [John Rawls, A Theory of Justice (Cambridge: Harvard
6 Erik Lindahl, Die Gerechtigkeit der Besteuerung University Press, 1971)]. Although our approach was
(Lund, 1919), A central portion of this has been trans- independently developed, Rawls had employed the
lated and is included in Classics in the Theory of Public "veil of ignorance" in earlier papers in the 1950s. Other
Finance , op. cit. scholars have used essentially similar devices as a means
7 See, for example, Duncan Foley, "Lindahl's Solu- of moving from the individual's short-term interest
tion and the Core of an Economy With Public Goods," to which may be called, in one sense, the "public
Econometrica, 38 (January 1970), 66-72; T. Bergstrom, interest."
"A Scandinavian Consensus Solution for Efficient In- 17 For a summary discussion of Puviani's contribu-
come Distribution Among Nonmalevolent Consumers," tion, along with a treatment of fiscal illusion more
Journal of Economic Theory , 4 (December 1970), 383- generally, see my, Public Finance in Democratic
98; D. J. Roberts, "The Lindahl Solution for Econ- Process (Chapel Hill: University of North Carolina
omies With Public Goods," Journal of Public Eco- Press, 1967), Chapter 10. An English translation of
nomics, 3 (February 1974), 23-42. Puviani's basic work will be published in 1976, under
8 R. A. Musgrave, "The Voluntary Exchange the supervision of my colleague, Charles Goetz.
 394 NATIONAL TAX JOURNAL [Vol. XXVIII
18 Anthony Downs, An Economic government.
Theory Theofseminal paper which stimulated much
Democ-
racy (New York: Harper, 1957). of this analysis was that by Charles Tiebout, "The Pure
Theory
19 William H. Riker, The Theory of of Local Expenditure,"
Political Coali-Journal of Political
Economy
tions (New Haven: Yale University , LXIV1962).
Press, (October 1956), 41&-24.
* For
*° Gordon Tullock, The Politics ofa Bureaucracy
more extensive survey paper which does
(Washington: Public Affairs Press, 1965).
have this as its objective, see, Dennis Mueller, "Public
Choice: A Survey,"
" Tulloclťs analysis of the bureaucrat Journal of Economic Literature
represents
(forthcoming).
perhaps the closest that public-choice analysis comes to
M My own book,
a parallel, but quite different, development Public Finance in Democratic
in modern
Processcalled
economic theory, that which has been (1967), op. dt .,theory
the is largely a call for such re-
of property rights. The latter worksearch, along with a McKean,
of Alchian, summary of some initial efforts,
and the provision
Demsetz, Pejo v ich, and others, has been concentrated of a suggested research agenda.
on predicting the effects of differing *7 Somereward-penalty
of the early applications are contained in the
structures, as defined in terms ofseparate
rights studies
to included
property, in the volume, Theory of
on individual behavior. For a summary, see,
Public Choice , edited Eirik
by James M. Buchanan and Robert
Tollison (Ann Arbor:
Furubotn and Svetozar Pejovich, "Property Rights University
and of Michigan Press,
Economic Theory: A Survey of Recent 1972). For a Literature,"
textbook in public economics that con-
Journal of Economic Literature , X (December
sistently employs a fiscal1972),
choice paradigm, see Richard
1137-1162. E. Wagner, The Public Economy (Chicago: Markham,
0 William Niskanen, Bureaucracy and Representa- 1973).
tive Government (Chicago: Aldine, 1971). M My methodological views are developed in several
M Two introductory attempts should be noted:of my books, some of which have been noted. In my
Albert Breton, The Economic Theory of Representativemost recent book, I try to examine some of the
Government (Chicago: Aldine, 1974); and Randall problems that emerge in trying to define "an individual,"
Bartlett, Economic Foundations of Political Power including the preliminary distribution of rights. See,
(New York: Free Press, 1973). my, The Limits of Liberty: Between Anarchy and
u Because of space limits, I have not included a fifth Leviathan (Chicago: University of Chicago Press, 1975).
line of analysis, that of locational public choice, or "voting 19 Cf. Martin Feldstein, "Social Security, Induced
with the feet," which has exerted a significant influence Retirement, and Aggregate Capital Accumulation,"
on public finance theory, especially as applied to local Journal of Political Economy , 82 (September/October,
governments and to the interrelations among levels of 1974), 905-26.