Fiscal Plumbing Quiz #1

feudal order

• a medieval European social, political, and economic system built on a hierarchy of land ownership and loyalty

• sovereigns granted land (fiefs) to nobles (vassals) in exchange for military service and allegiance; the nobles then granted land to lesser lords and knights, creating a chain of obligations; these relationships took place between private individuals, not state and individual

• serfs were tied to the land and were born into this position (ascriptive society based on “organic orders”); unlike chattel slavery, this system was based more on linguistic, ethnic, or religious differences

patrimonial state

• a patrimonial state is a form of governance in which a ruler treats the state and its resources as their personal property

• is based on personal loyalties rather than formal, legal, and impersonal institutions

• in the feudal system, each lord ruled his territory as a personal patrimonium (nulle terre sans seigneur=no land without a lord)

• there is no distinction between public and private—rulers exercised their private rights as landlords

tax state

• a political and economic model where the government relies heavily on taxation for revenue

• the rise of the tax state marks the simultaneous creation of the public and private spheres, spheres that are co-constituted—you can’t have one without the other (e.g., the public sphere exists only because it draws on private wealth through taxation)

• can be argued as a contract state: the government bargains with its citizens (govt gets revenue while citizens are given benefits in return)

what was significant about the creation of private and public spheres?

• undermines ascriptive societies by universalizing certain categories: every person is simultaneously a “private individual” with rights/property and a “public citizen” subject to laws and taxes

• this universalization extended markets because once individuals are recognized as private actors, they can exchange goods across traditional status boundaries

• equality and democracy emerge as an ideal because taxation and representation tie the public sphere (state revenue, law) to the participation of private individuals

contract state

• the political order created when individuals seeking order collectively agree to give up certain freedoms and submit to a sovereign authority in exchange for security and order

• the sovereign can be created by force (from above; commonwealth by acquisition), or by mutual consent (from below; commonwealth by institution)

• arise in order to “tame our passions” and reconcile with differences between individual

• contract states set in motion the development of both the public and private spheres

sovereignty

• sovereignty=supreme power or authority/the authority of a state to govern itself or another state

• was fragmented/parcelized in feudal states (i.e., there was no central authority, but several lords who oversaw their respective territories)

jurisdiction

the extent to which the sovereign can make legal decisions and judgments

state capacity

• the ability of a government to effectively implement its policies, enforce laws, and provide public goods and services within its territory

• acquired by gaining (1) control over resources, (2) creating central bureaucracies, (3) suppressing landed aristocracies and economic oligarchs, and (4) integrating (and co-opting) the former three things into the workings of the establishment

• Tilly: argues that increased state capacity enables democracy to flourish since you can’t have democracy without uniform rules and laws and a state capable of enforcing them; is a necessary but insufficient condition for democratization

• Smith: required for the govt to implement more direct (fairer) taxes

acquisition of state capacity via supression

• entails suppressing landed aristocracies and economic oligarchs

• though state capacity may be acquired through resource control and the creation of central bureaucracies, suppression introduces the possibility of democratization

direct tax

• taxes paid directly by the individual or organization to the governing body; cannot be shifted to another party

• typically levied on wealth, property, or income

• better than indirect taxes since it more accurately reflects relative wealth and avoids multiple taxation of the same input

• difficult to implement since the state lacks the capacity to do so

indirect tax

• taxes levied on goods and services (e.g., general sales taxes, excise taxes, customs duties and tariffs)

• referred to as indirect since the person who pays the tax to the government (seller) is not the one who ultimately bears the economic burden of it (final consumer)

• Smith argues that luxuries, not necessities should be taxed, as taxing luxuries is fairer and discourages profligacy (extravagant spending)

• are easier than direct taxes since they are implemented on objects with more concrete value

customs duty/tariffs

• a form of indirect tax imposed by a government on goods that are imported or exported across national borders

• can be either calculated as a percentage of the goods’ value (ad valorem), a fixed amount per unit of weight or quantity (specific duty), or a combination

excise tax

• indirect taxes on specific commodities (e.g., salt, tobacco, petrol, alcohol)

• have been used in the past on universal goods; because the consumer uses a small amount of basic commodities (e.g., salt) every day, it is hard for them to notice a tax and because of their universal use, it is easy to raise revenue

• Adam Smith criticizes excise taxes on the necessities of living because they raise both the cost of living AND labor; is okay with taxes on luxuries since they do not raise the cost of labor and does not diminish the ability of the “inferior ranks of people” to bring up families

taxation by ability to pay; benefit; obligation

• Adam Smith believes that everyone “ought” to pay for taxes in proportion to ability to pay because they are all part of the same enterprise (society as a joint partnership)

• assumes that the government will provide a proportional benefit (e.g., someone who has more trade to secure (greater benefit from society) should contribute a larger share)

Wagner’s Law

• simply states that as the economy grows, the share of the economy taken up by state functions tends to grow because the state’s financial requirements grow in proportion at all levels of government (i.e. development is accompanied by increased share of public expenditure in GDP)

• when income rises, so too does the demand for public goods, making the economy more complex, pushing up the need for state coordination

• advancement means that individuals no longer need to be concerned about basic survival and begin expecting more from the government to channel funds into welfare

• more overall income makes it less acceptable for people to suffer for reasons other than their own doing

tax handle

• part of an economic system to which taxes can be attached; something the state can “get a handle on” in order to raise revenue

• easy tax handles: land, customs duties, visible production, etc.

tax farming

resource curse

• aka the paradox of the plenty

• hypothesis that countries with an abundance of natural resources have lower economic growth, lower rates of democracy, or poorer development outcomes

rentier state

• a country that relies on revenue from external sources (e.g., renting out natural resources or foreign aid, rather than taxes)

• these states need not do much within their own nations to raise the revenue necessary to support its functions

• based on the concept of “rents” as defined by Adam Smith (revenue based on ownership of land or resources)

• examples: Saudi Arabian and Russian oil exports

resource curse and rentier state relationship

• the flow of money from external sources grants leaders huge discretionary funds, enabling them to rely on oil/gas revenue instead of taxes, so they don’t need to listen to their citizens’ needs

• profits from a single major resource discourage the state from investing in a broad range of industries, making the economy vulnerable to price shocks in global resource markets

• helps the controlling regime stay in power (they can use their pools of money to fund repressive security forces or buy loyalty)

• without an extensive tax apparatus, there is less incentive to centralize the fiscal apparatus, collect data on the economy, set priorities, establish regulations, and adopt modern accounting and managerial practices, etc.

Washington consensus

• a set of free market-oriented economic policy prescriptions for developing countries that have been advocated by international financial institutions like the IMF and World Bank

• includes broadening the tax base, relaxing restrictions on foreign direct investment, removal of tariffs and quotas to promote free trade, developing property rights, diverting public spending from subsidies to long-term growth supporting sectors like primary education, healthcare, and infrastructure

• allows elites to park their wealth offshore (capital controls are reduced and eliminated so they can move it across borders), meaning the country they live in does not get as much of their taxes

• many countries begin relying on debts to finance war and development, but in ways that don’t require or delay taxation, reducing bargaining over state performance

Quasi-voluntary compliance

• Brautigam argues that tax payment is “quasi voluntary” because there are so many norms, incentives, and sanctions surrounding taxation

• taxpayers pay taxes partially because they expect that the ruler will provide services in return for the revenue they provide

• there is an underlying threat of penalties, audits, fines, or confiscation (sanctions)

• compliance is sustained when people believe others are also complying and when the state can punish defectors (if everyone cheats, the roads don’t get fixed)

• it is voluntary in the sense that the state doesn’t necessarily have the capacity to catch every single person that doesn’t pay taxes+nobody will kill you if you don’t pay taxes

state capture

• one of Brautigam’s state models in which the state is considered an instrument of dominant social groups and acts in their interest

• hard version: state serves only the dominant class (e.g., Russian state bargained with elites who gained control of formerly state-owned resources)

• clearer version: dominant classes enjoy extraction and predation more so in states run by landed elites dependent on cheap labor and cash crops; in this case, elites have a strong incentive to capture the state to keep wages low and enforce their control; the state works in their favor primarily because the state revenue comes from the profits of the elites

state autonomy

• in this state model, states are so strong that they stand above society, impacting development relatively autonomously

• represents petrol states, patrimonial states

• the foreign corporate influence increases, with the governments being uninterested in taxing their own people for political reasons

• some states that fall into these categories lose state capacity when natural wealth is discovered

fiscal covenant

• where you get idea of quasi-voluntary compliance

• in this model, citizens agree to pay taxes in exchange for certain public goods and services from the government

• supported by the fact that countries with a higher percentage of their revenue coming from direct taxes have higher property rights protection (a concern of those at higher income levels)

poll tax

• a regressive, direct tax levied on every liable individual without reference to income or resources

• one of the oldest forms of direct taxation

• are inefficient (i.e. the cost of implementation exceeds revenue) since you may have to implement censuses, registration lists, other forms of record keeping

• are implemented for other reasons (e.g., documentation, are quite simple, etc.)

• the target is easily countable, so the state doesn’t need complex bureaucracies to estimate income, wealth, or production

tax effort

• the degree to which countries make use of the potential for revenue generation afforded by its particular economic structure

• low tax effort=the state is not taxing everything it could, often due to weak institutions, corruption, or elite capture

• many governments have high tax effort but unwilling to use that increased state capacity

• influenced by the political system and attitudes toward government

tax morale

• the people’s intrinsic willingness to pay taxes

• cultural side of compliance

• influenced by: people’s sense of fairness, risk perception, penalty impact, moral obligation, and the extent to which they believe the government will use the funds appropriately or spend on public goods that benefit them

process legitimacy

• the extent to which a political system or government is considered legitimate based on the fairness and transparency of its decision-making processes rather than on the outcomes or policies it produces

• key elements: adherence to rule of law, transparency, protection of civil liberties

• important for maintaining stability and compliance, even if policies aren’t universally popular

output legitimacy

• the degree to which a government or political system is considered legitimate due to its effectiveness in achieving desired outcomes and solving collective problems for the public

• focus on performance rather than processes, consent, participation, etc.

• example: a system that successfully provides essential public services like healthcare or infrastructure

Why does Hobbes say that “men” are not bees? What would a society organized like bees look like?

• bees instinctively work together without need for extrinsic motivation

• men are compete with one another for honor and dignity, gain pleasure from feeling as though they are better than others, think of themselves as better than others, can misrepresent things, can be personally insulted (you did this to me) rather than experience just damage (shit happens), and create agreements through covenant (artificial contracts)

• society organized by bees would be self regulating, collaborative, and clearly structured (a single Queen bee and her many worker bees); people would know their place and work together to carry out a goal

What does Hobbes mean by a “sovereign” and why is his “sovereign” not just the Queen Bee?

• a sovereign is the authority created by humans (typically through social contracts) to impose order

• once created, sovereigns have the sole tax power, power to print money, oversee the police force, declare war

• sovereigns hold absolute power to make and enforce laws (ensure compliance through reward and punishment), declare war, print money, and ensures peace and security which allows society to function

• humans do not follow the sovereign due to intrinsic loyalty; they do so because they chose to submit in order to escape violence and insecurity

• creates a clear distinction between the authority of the sovereign (public sphere) and the rights of the individuals (private sphere)

Why does Schumpeter say that the tax state entails the simultaneous creation of public and private spheres? How does his “aside” about bees fit with Hobbes’ use of the metaphor; how does it differ?

• Schumpeter says that society would not be very organized if not for the tax state

• Argues that only once people recognize their individuality and are considered separate and autonomous, the state becomes a distinct institution

• If people are instinctively collectivist (like bees), a formal state is unnecessary because social order exists naturally

• the state’s purpose is to coordinate and protect collective interests, not to exist for no reason

• Schumpeter emphasizes how institutions create social order, while Hobbes emphasizes why we actually need authority

Smith, like Hobbes, argues that the primary purpose of the state is to maintain civil order. But does he ascribe other functions to it? Is his “nightwatchman” state simply a nightwatchman?

• nightwatchman state is one that is limited and minimal (nightwatchman is imagined as a lonely, elderly figure that is neither inactive or alert, looking for people intent on public harm)

• In Smith’s view, if the state had little to do beyond that which was necessary, its burdens couldn’t be that heavy upon the taxpayer (i.e. inserting itself into places that it need not will drive up the need for revenue, and therefore require that taxpayers pay more)

• Smith prefers the state to finance defense, justice/police, public works, and education to prevent private capture in those sectors

• Smith acknowledges the state’s role in regulating and supporting activities necessary for public welfare—it intervenes where private markets fail

How does Smith characterize good and bad taxes?

• the state should be funded by taxes, not by its “own” revenues

• equity: (1) taxation in proportion to ability to pay (relative wealth) and (2) taxation in proportion to the benefits people receive from the state BECAUSE they are part of the same enterprise

• time and manner of collection should be certain and convenient to the taxpayer

• economy: the cost of collecting a tax should be as low as possible; taxes should be efficient

How do Smith’s characterizations of “good” and “bad” taxes carry over into his discussion of property tax valuation and collection?

• property tax valuation should be determined with respect to the productivity of land. thus, we should look at the rental value of the land to get a more “equitable estimation” of their agricultural yield

• taxation as a proportion of land rent captures the difference in the value of the land and is fairer, yielding more revenue

• is difficult since it requires more regular estimations which isn’t easy—>administrative costs go up, and inconvenience and possibilities for noncompliance also go up

Why does Smith prefer direct taxation?

• it is fairer as it more accurately reflects relative wealth (more property naturally means more tax)

• avoids the multiple taxation of the same input

Why does Smith say direct taxation is difficult?

• everywhere, the properties are often valued without respect to the productivity of the land and so taxes generate less revenue than they should

• the more exact valuation tries to be, the more technically complicated it becomes and the more capacity it requires

the importance of tax base

• tax base: the object or activity that is being taxed (e.g., income, property, consumption, imports, etc)

• two taxes with the same rate can yield wildly different revenues depending on how the base is valued OR simply depending on size (10% on all income vs 10% on wages vs 10% on tips only)

What does Tilly say about the relationship between war, state capacity, authoritarianism, and democracy? What did you find counterintuitive about his argument?

• war requires resources but in order to extract those resources, you need centralized powers that can enforce taxes

• require state capacity to evaluate tax base and also implement taxes well

• taxation opens the door to democratization since states initiate cycles of intervention, resistance, repression, and bargaining in implementing taxes

• authoritarianism increases state capacity so much that democracy is possible; rulers centralize power and ensure that resources are extracted, establishing all powerful legal systems, bureaucracies, etc.

• need uniform rules and laws and a state capable of enforcing them to have democracy

How does Wagner’s idea of the state differ from that of Smith and Hobbes? Does he think the state’s role in society will progressively increase?

• Wagner believes that the state’s role in society will progressively increase as society becomes more industrialized and the economy grows

• Believes state growth is driven by societal needs and pressures, not just to secure power or respond to threats

• Smith sees the state as a “nightwatchman,” doing only what it needs to do to provide security, while Wagner acknowledges that people will start to look towards the state to provide welfare

Where does Kaldor lay the blame for the difficulties developing countries have with taxation?

• indirect taxes make up a greater proportion of the revenue, so most taxes are regressive and the burden falls more on the poor rather than the wealthy

• excess personal wealth goes toward personal consumption; the elites aren’t making concessions with the lower classes, preserving a “quasi-feudal” order

• colonial states didn’t build modern tax systems, and were instead concerned only with extracting resources to serve the mother nation

• aren’t utilizing land tax well enough, with agriculture being a source of untapped taxable capacity; most land taxes based on outdated valuations

• colonization left behind economies reliant on only one or a few exports

• secrecy of property valued a lot in some nations and you can really only tax things you can “see”

What factors does Brautigan discuss in trying to explain why the “revenue imperative” has not led to the development of state tax capacity in the developing world?

• the revenue imperative is the need for governments to mobilize sufficient revenue through taxes to meet their fiscal obligations and fund public services

• colonial regimes focused on extractive taxes, not broad, equitable tax systems

• upon gaining independence, new states often inherited weak fiscal institutions and bureaucracies

• one argument is that the state has been captured by the elites

• reliance on foreign aid and taking on debt reduces incentive to develop more effective tax systems

• developing economies often rely on agriculture, small-scale trade, and informal sectors that are hard to tax (weaker “tax handles”)

What did Adam Smith argue about tariffs?

• warned against reliance on tariffs

• if another country can make a good cheaper than us, it's better to buy it off of them than waste our own resources trying to make it ourselves

• believes that this extra cost will fall upon the consumer when manufacturers need to raise prices to make up the difference