Tax policy from a public choice perspective

Summary

Abstract - Tax policy is a product of politics, so a complete understanding of tax policy requires an explicit recognition of the political environment within which tax policy is made. The paper emphasizes the concept of political costs associated with the tax system and discusses several aspects of tax policy using a public choice approach. The paper argues that the political costs associated with taxation can be minimized by embedding the tax system within a relatively inflexible fiscal constitution. Despite the insights the public choice perspective offers, most analysis of tax policy does not take public choice considerations into account.

Despite the fact that the tax structure is a product of the political process, rarely does an economic analysis of tax policy take account of the political environment within which the tax structure is designed. The political environment is important for several reasons. Most obviously, because the tax structure is a product of politics, one must understand the political process to completely understand the tax system. Furthermore, if the tax structure is designed appropriately, the collective choice process can provide a revealed preference mechanism that can help enhance the efficiency of government both on the tax side and the expenditure side of the ledger. Also, public choice analysis might lend some insight into what constitutes an equitable tax structure.