Collective goods and principles of taxation
The scope of Wicksell’s contributions to the theory of public finance is not limited to social policies that correct dysfunctional outcomes of the market process. The first part of his “studies in the theory of public finance” (Finanztheoretische Untersuchungen, Wicksell 1896: 1-75) sets the focus on tax incidence and compares the distributional effects of direct and indirect taxes.
In this context Wicksell demonstrated that a (direct) tax on profit is to be preferred to (indirect) specific taxes and ad valorem taxes, since the latter induce welfare-reducing effects on prices and quantities.The greater innovation is found in the second part of the studies where Wicksell developed “a new principle of just taxation” (1896: 76-164). He criticized the dualist practices and doctrines of his time, which dealt with state revenues and expenditures as if they were completely separate entities, where revenues are tailored to what taxpayers can afford to pay, while expenditures are autonomously governed by the state’s interests. Wicksell considered it to be unjust to define the distribution of the tax burdens, and thereby determine the state revenues, independently of the decisions taken about the supply of “collective goods”, such as roads, mail services and theatres. The order should be reversed: the benefits to the taxpayers should determine the corresponding distribution of the tax burden. Wicksell argued that the principle of voluntary exchange, or quid pro quo, should apply to the public sector, too, so that the marginal principle could become effective (with some exceptions, duly defined). He deemed it possible to offer enough options for the distribution of the costs of collective goods that general consent on their finance could be reached in each and every case. “[I]f the corresponding expenditure promises any value that exceeds the costs, it will doubtlessly be considered as beneficial and, hence, might even be approved unanimously” (1896: 113, my translation).
In principle, Wicksell insisted on unanimous votes, in order to remain close to the rules of voluntary exchange. “For practical reasons”, however, Wicksell (1896: 116-17) defined the lower boundaries of “relative unanimosity” at the levels of 90 or even 75 per cent. Any failure to achieve these levels should be considered as sufficient proof that the social benefits of the projects in question are smaller than their costs. In this case they should be rejected. Above these levels, however, state expenditures and the supply of collective goods could be expanded up to the point where their marginal benefits equal their marginal costs. Wicksell’s application of the marginal principle to the public sector helped to provide another set of neoclassical arguments for welfare-state policies.For Wicksell (1896: 125) the great advantage of his consensus rule was a higher degree of legitimacy and acceptance. Instead of regarding the taxes they have to pay as an unjust burden, citizens would consider them as the means to provide for their need of collective goods. Wicksell admitted that the consensus could be abused and undermined by way of vetoing holdups and free riding. Yet he believed these risks to be rather small and amenable to regulation. He nevertheless insisted that the consensus rule for taxation would work only if there was a fair distribution of wealth and income right from the start. “Otherwise it is impossible to speak of equal exchange, and of the equality of the sacrifices made; it is no ‘service’ to the state, nor a ‘sacrifice’ that could be accepted as such, if a person is made to return to it what he had unjustly possessed” (1896: 143, my translation). From this followed Wicksell’s distinction between allocative and redistributive sections of the taxation system. In addition to consensual taxation for the provision of collective goods there ought to be inheritance tax and taxes on accidental gains, based on democratic voting (1896: 142-60). As Samuelson (1988: 30) has pointed out, Wicksell believed that Adam Smith’s invisible hand needed the helping hand of redistribution by taxes and transfers in order to make the marginal utilities of different members of society “ethically comparable”.