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The Uneasy Case for the Flat Tax

  • Francis Buckley

    (George Mason Law School)

  • Eric Rasmusen

    (Indiana University, Kelley School of Business)

There is a secret paradox at the heart of social contract theories. Such theories assume that, because personal security and private property are at risk in a state of nature, subjects will agree to grant Leviathan a monopoly of violence. But what is to prevent Leviathan from turning on his subjects once they have lain down their arms? If Leviathan has the same incentives as his subjects in the Hobbesian state of nature, he will plunder them more thoroughly than ever they plundered themselves in the state of nature. Thus the social contract always leaves subjects worse off, unless Leviathan can fetter himself. And how can Leviathan bind himself, if he can always impose confiscatory taxes or choke off trade through inefficient regulations? This Article suggests that schemes of progressive taxation, in which marginal tax rates increase with taxable income, may be seen as a useful incentive strategy to bribe Leviathan from imposing inefficient regulations. Income taxes give Leviathan an equity claim in his state's economy, and progressive taxes give him a greater residual interest in upside payoffs. Leviathan will then demand a higher side payment from interest groups to impose value- destroying regulations. Of course, progressive taxation imposes its own incentive costs, by reducing the subject's private gains. However, these costs must be balanced against the gains from correcting Leviathan's misincentives, and it may that such gains exceed the costs of progressive taxation.

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Paper provided by EconWPA in its series Public Economics with number 9907003.

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Date of creation: 13 Jul 1999
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Handle: RePEc:wpa:wuwppe:9907003
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