DP4210 Viable Taxation

Author(s): Carlo Perroni, Kimberley Scharf
Publication Date: January 2004
Keyword(s): government, public goods, taxation
JEL(s): H10, H20, H30, H40
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4210

Taxation is only sustainable if the general public complies with it. This observation is uncontroversial with tax practitioners but has been ignored by the public finance tradition, which has interpreted tax constitutions as binding contracts by which the power to tax is irretrievably conferred by individuals to government, which can then levy any tax it chooses. In the absence of an outside party enforcing contracts between members of a group, however, no arrangement within groups can be considered to be a binding contract, and therefore the power to tax must be sanctioned by individuals on an ongoing basis. In this Paper we offer, for the first time, a theoretical analysis of this fundamental compliance problem associated with taxation, obtaining predictions that in some cases point to a re-interpretation of the theoretical constructions of the public finance tradition while in others call them into question.