Classics in the Theory of Public Finance

264 Pages·1958·29.99 MB·English

by  Richard A. Musgrave, Alan T. Peacock (eds.)

CLASSICS IN THE THEORY OF PUBLIC FINANCE
Classics in the Theory
of Public Finance
Edited by
Richard A. Musgrave
and
Alan T. Peacock
M
in association with the
St. Martin9s Press Palgrave Macmillan
o
InI~mational Economic A~~ociarion 195K
Softcover reprint of the hardcover 1st edition 1958 978-0-333-61355-9
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ISBN 978-0-312-12162-4
Library of Congr~' Cataloging-in-Publication Data
CIa~,ic~ in the theory of public finance / edited by Richard A.
Mu'gr:tve and Alan T. I'eacock.
p. cm.
Include~ bibliographical referrnc~ and index.
ISBN 978-0-312-12162-4
I. Finance, Pllblic-tli~tory. I. Mu~ve, Richard Abel, 1910-
II. Peacock, Abn T. 1922-
1IJ14l.C55 1994
336-<fc2() 94-115R
CII'
CONTENTS
l'ag~
Preface
VII
Preface to the Fourth Impression Vlll
Preface to the Fifth Impression
IX
Introduction RICHARD A. MUSGRAVE and ALAN T. PEACOCK xm
Three Extracts on Public Finance ADOLPH WAGNER
Contribution to the Theory of the Distribution
of Public Expenditure MAFFEO PANTALEONI 16
On Taxation LORENZ VON STEIN 28
The Formation of the Prices of Public Goods UGO MAZZOLA 37
On Progressive Taxation ARNOLD JACOB COHEN STUART 48
A New Principle of Just Taxation KNUT WICKSELL 72
The Pure Theory of Taxation FRANCIS YSIDRO EDGEWORTH 119
The Fundamental Principles of a Pure
Theory of Public Finance GIOVANNI MONTEMARTINI 137
On Taxation in General PAUL LEROY-BEAULIEU 152
On Public Needs ENRICO BARONE 165
Just Taxation - A Positive Solution ERIK LINDAHL 168
The Valuation Theory of Taxation EMIL SAX 177
A Theory of the Public Economy FRIEDRICH VON WIESER 190
A Sociological Approach to Problems
of Public Finance RUDOLF GOLDSCHEID 202
Some Controversial Questions in the Theory of Taxation ERIK LINDAHL 214
Communal Economy and Market Economy HANS RITSCHL 233
Index of Names 243
PREFACE
For some forty years, beginning about 1880, a lively debate on one of the
central problems in welfare economics took place between Continental
writers on public fmance. This problem was concerned with the optimum
distribution of resources between the government and the private sector,
and with the ideal means of taxing individuals so that resources could be put
at the disposal of the state. The debate absorbed the energies of Austrian,
French, German, and Swedish writers, and made the reputation on the con
tinent of the Italian writers on public fmance. It would be interesting to
speculate on the reasons for the neglect of these writers in the English-speaking
world, were it not that so many other writers in the field of economic theory
encountered similar treatment. We may be sure, however, that this neglect
has meant that Anglo-Saxon economics has suffered in consequence. More
over, this seems an appropriate moment to introduce some of this largely
forgotten work, because controversy on welfare economics in English
language journals has recently turned to the problem of the pricing of public
goods, albeit rather belatedly.
In the present volume, we cannot do more than provide a sample of the
voluminous literature on the subject. However, it can be claimed that the
writings of no important school of thought have been omitted. We have
tried to assist the reader in the understanding of the evolution of the debate
by means of an Introduction.
The arrangement of material which seems best suited to clarify the pattern
of the debate is a chronological one. It is true that this arrangement results
in the placing of the work of Sax almost to the end of the period of debate
instead of establishing his right to be one of the pioneers of the application
of utility analysis to public expenditure. However, we have preferred to
print Sax's final thoughts on the subject and to discuss his earlier work in
our Introduction.
We feel also that our approach demands the inclusion of the famous dis
cussion ofjustice and taxation by Edgeworth, although this is already available
in English.
The editors are indebted to many people who have helped in selecting and
translating the essays here presented, and in permitting their reproduction.
In particular, thanks are due to Professor James Buchanan of the University
of Virginia, for his assistance in the Italian selections. Our only regret is that
so much good material had to be omitted, reflecting no doubt the pains of
social choice which are the basic subject of this volume.
THE EDITORS
PREFACE TO THE FOURTH IMPRESSION
The first (1958) edition of this 'York was prepared mainly for specialists on
the assumption that itwould provide the background to an important neglected
field of'discussion in public finance. Since that date, the theory of public goods
and its implications for public policy has become incorporated in the main
body of the economic analysis of public fmance in the Anglo-Saxon literature.
A glance at the footnotes of rome of the standard textbooks on public fmance
indicates that this assembly of articles has not been in vain. Indeed, the first
edition has already been reprinted twice, and now seems the appropriate time
to make the work available as a paperback also.
Probably the most influential part of this collection has been the theory of
public expenditUre, which contains two closely related elements. The first is as
a part of welfare economics: under what conditions, if any, can Pareto opti
mality be achieved in an economic system in which some goods supplied are
indivisible! This question has been considered very thoroughly in recent years
with due attention paid to the earlier work ofWicksell and Lindahl in particular.
The other strand of thought is concerned with the positive theory of the public
sector: how can we use economic analysis in order to explain how the size and
composition of the budget is actually determined! This is a much more difficult
question to answer because it entails the development of a theory of collective
action. While there is less evidence of fundamental thinking on this question
in this work, it is perhaps of interest to note that, since it first appeared, Erik
Lindahl in one of his last appearances in print, has offered some interesting
observations on this second element exactly forty years after the appearance of
Die Gerichtigkeit der Besteuerung (1). The essence of his contribution is an attempt
to employ utility theory, as developed in his earlier work, to explain the size
composition of the Swedish budget during the twentieth century.
Lindahl also showed in this contribution that he was fully familiar with recent
work outside Sweden which stemmed from his own earlier contributions.
There is a lesson to be learnt from this when one considers how long it has taken
for him and his contemporaries to receive the attention which was denied them
in the past.
THE EDITORS
(1) "Omskatteprincipcrochskattepolitik", El!#nonli Politile Samluillt, Festkrift till Berti! Ohlins 6o-hsdag,
Stockholm, 1959, pp. 151-171. .This paper is available: in an English translation by T. L. Johnston in
l>ttmu~tiotuJI &otwmic Papns, No. 10, pp. 7-2.3.
PREFACE TO THE FIFTH IMPRESSION
Neither of the editors envisaged that, thirty-five years after the first appear
ance of this work, the publishers would invite us to re-introduce it.
Their reason must be that scholars and their students may still find it useful
not simply to have the work in the nearest library but even on their book
shelf. That being so, it is arguable whether a further preface is needed when
the interest of those consulting the work presumably still lies in the classical
literature rather than further commentary. Nevertheless, it may be of interest to
consider how f.u Classics stands up to the tests set by the scope and method of
public finance theory, as it is taught and practised today, for there have been
major changes since we first compiled this collection.
The first major change is that the teaching of public finance has become
throughly integrated with the standard body of micro theory and relabelled
"public economics". Following general practice in academic economics, much
of the :malysis is presented in more rigorous and mathematical form, along
with empirical testing by econometric methods. The remaking of incidence
analysis in general equilibrium models offers a good example. The computer
revolution has not stopped short of public finance. At the same time, increased
emphasis on technique has tended to crowd out the history of economic
thought as an integral part of economic training and concern. Public finance
has been no exception, as is testified by the contemporary contents of its
leading journals, but it has not been affected to quite the same extent. One
reason for this is that the economics content of the training of political
scientists and public administrators has been increased, and public finance
represents a major element in this change. These fields of enquiry are more
sympathetic to and possibly more dependent on the study of the evolution of
ideas and there is much in the history of fiscal thought which would be
consonant with such an approach. A further reason is that major new
developments in the content of the economics of public finance have derived
some of their inspiration from a reconsideration of the work of past genera
tions, including some of their contributions in this volume. As it happens,
prominent authors of the past who form this link with present ideas were no
slouches when it came to mathematical formulation, for example Wicksell and
Edgeworth. Looking back, we must plead guilty with regard to two omissions,
papers which had appeared prior to the first publication of this volume (1 958).
As is evident from this later perspective, Ramsey's classic contribution on the
theory of taxation (1 927) should have been included since it had laid the basis
for the theory of optimal taxation which was to blossom fifty years later.
Samuelson's classic piece on the pure theory of expenditures (1954) should also
have been part of these pages, since it formally integrated budget activity into
the framework of welf.1re economics. ·
X PREE4CE TO THE FIFTH IMPRESSION
This brings us to the second major change which, as already hinted at, refers
to the content of the economics of public finance itself. The subject of public
choice in which economic analysis of human behaviour has penetrated the
study of electoral systems, legislative procedures and bureaucratic action has
burgeoned (for excellent commentary, see Mueller (1989)). The influence of
both normative and positive public choice analysis with its wider perspective
has been profound and a revised edition of this volume would call for additional
material to show its historical roots. Nevertheless, we can at least claim that
Classics offers a starting point for examining the historical origins of public
choice theory, notably in the contributions of Lindahl, Wagner and, of course,
Wicksell, which are frequently cited in the present-day literature. But judged
from a contemporary standpoint, public choice theorists anxious to widen
the perspective of their students would clearly wish to add such authors as
Condorcet, de Tocqueville, Puviani, to mention only those whose work did
not appear in English. Following our own precedent of including Edgeworth,
in order to preserve historical balance, one would have to extend this list to
include, amongst others, excerpts from Hobbes, Locke, Hume, Smith, Charles
Dodgson (Lewis Carroll) and Black.
The third major change is represented by the revival of the utilitarian theory
of taxation. It will be recalled that Edgeworth presented an elegant demon
stration of the proposition, already advanced by Bentham, that if the marginal
utility of income falls as income rose (assuming interpersonal comparability and
similar utility functions), then the utilitarian goal of least total sacrifice or
maximum welfare would require the government to equalize income: "(t)he
acme of socialism is thus for a moment sighted; but it is immediately clouded
over by doubts and reservations" (loc.cit.). He accepted that as well as the need
to minimize disincentive effects of taxation, practical difficulties, such as tax
evasion, and other policy objectives, would severely modify any policy conclu
sions that his analysis suggested. The present-day theory of optimal income
taxation is essentially a more explicit version of Edgeworth's model and his
caveats, so Classics is still useful for those interested in its origins. Optimal t.1x
theory also extends to the formulation of rules for the imposition of
commodity taxes. Here the matter to be resolved is the extent to which
efficiency criteria requiring the taxing of commodities with low price elasticity
conflict with utilitarian equity criteria which entail lessening the overall tax
burden of the lower income groups. (For a useful summary of optimal taxation
and policy issues, see Heady (1993).) This model of optimal taxation remains
to be reconciled with earlier views which defined good taxation in terms of
horizontal and vertical equity rules.
Although conscious of the gaps in the literature which are still to be filled,
yet not anxious to embark on another expedition down the highways and
PRET-ACE JD THE FIFTH IMPRESSION XI
byways of the history of economics, perhaps other work of the editors may
help anyone who should wish to supplement the contributions reprinted in
this volume. Musgrave's "A Brief History of Fiscal Doctrine" (1985), as the
title suggests, gives a conspectus of the history of the subject in the span of
fifty pages and contains over 15 0 references, a large proportion being works
before 1900. In a more specialized contribution Peacock (1992) has raised
the question as to whether the study of the history of fiscal thought is a
necessary element in the training of public economists, illustrating his answer
with references to those thinkers interested in explaining the causes and
consequences of the growth in public expenditure. The reader of these
works should be warned, however, that as well as being possibly useful as
works of reference, the editors are still out to persuade the reader that the
hi~tory of fiscal thought is both fascinating and important. Analytical
developments since they first met forty years ago have not diminished their
enthusiasm for preaching this lesson!
THE EnnoRs
References
Christoph~r H~ady, "Optimal Taxation a~ a Guid~ to Tax Policy", Fi.(atl Studies, Vol. 14,
No. 1, F~bruary 1993, pp. 15-41.
D~nnis C. Mu~ll~r. Public Clrc>ire II (Cambridge Univ~rsity Pre~~. 191!9).
Richard A. Musgrav~. "A Urief Hi~tory of Fi~cal Doctrine", in A. J. Auerbach and M.
Feldstein (~ds), llmrdbc>ok C!f Public Errmc>~rric.( (EI~evier, 191!5), reprinted as Chapter 23 in
Richard A. Mmgrave, Public Firrarrce irr a Democratic Sc>ciety: Volume II (Whea~heaf), pp.
331!-393.
Alan T. Peacock, Public Clrc>icc Arralysis irr Hi.llc>rical Past'atir~·. Mattioli Lecture~. Cambridge
University Pre~~. 1992.
F. Rams~y. "A Contribution to th~ Theory ofT.1xation", r:twrc>micJ.,rrrra/, 37, 1927.
Paul A. Samuel~on, "The Pure Theory of Public Expenditures", Re11h11' C!f Ecc>rromirs arrd
Sllltistirs, 1954, pp. 3R6-3R9.