BY: F. H. BUCKLEY
George Mason University, School of Law
ERIC BENNETT RASMUSEN
Indiana University at Bloomington
Department of Business Economics & Public Policy
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Paper ID: Indiana University, Business Economics and Public
Policy Working Paper No. 99.002
Date: July 13, 1999
Contact: ERIC BENNETT RASMUSEN
Email: Mailto:erasmuse at indiana.edu
Postal: Indiana University at Bloomington
Department of Business Economics & Public Policy
1309 East Tenth Street
Bloomington, IN 47405 USA
Phone: (812)855-9219
Fax: (812)855-3354
Co-Auth: F. H. BUCKLEY
Email: Mailto:fbuckley at osf1.gmu.edu
Postal: George Mason University, School of Law
3401 N. Fairfax Drive
Arlington, VA 22201 USA
ABSTRACT:
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.
JEL Classification: H00, H11, H21, H50, L50, L51, P00