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Duke Economics Working Paper #03-20
A long-standing question in public economics is why governments do not rely on lump-sum taxes to satisfy revenue requirements. The previous literature has found that lump-sum taxation may result in ruinous political conflict, but has not disentangled the effects of restrictions on the efficiency of tax instruments from the effects of restrictions on the discretion with which they may be assigned. This paper demonstrates that when policymakers are not allowed discretion in assigning obligations, as when lump-sum taxes must be uniform, the outcome is efficient. In contrast, prohibiting the use of lump-sum taxes without restricting discretion may still lead to ruinously high levels of conflict. A simulation shows that a restriction on the efficiency of tax instruments is only optimal in conjunction with a restriction on discretion, and only then if policymakers are sufficiently inattentive toward distributional issues.
Key words: common agency, lobbying, lump-sum taxation, discretion
JEL: D72, H21
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19 pages