Monday, April 22, 2013

Meta-EE and the Constitution Part 12: Sixteenth Amendment

Amendment XVI:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
From Riker (1964), federalism requires (a) a hierarchy of governments and (b) [de facto, not merely de jure] autonomy at each level. Weingast (1995) adds the following to make federalism market-preserving (i.e. meta-euvoluntary, or close enough for our purposes here) (c) subsidiary governments rather than the national government retain regulatory authority (this helps with Tiebout competition) (d) a de facto and ideally de jure common market exists and (e) sub-national governments face a hard budget constraint (no bailouts for spendthrifty municipalities, no free credit, no hand on the lever of the printing press).

Another way to look at Weingast is that the role of the sovereign authority, the national government is to act as sort of a meta-manager for the subsidiary governments, to keep the rule of law intact. When this is done right, we have one necessary ingredient for baking the cake of economic development. When it's done wrong, it's like someone put too much icing on Jimmy's 10th birthday confection.

Bad metaphors aside, the point of regulatory restrictions is to say "no" to transactions. Sometimes it makes very good sense to say "no" to transactions. Dumping poisons upstream of residential areas is something it makes sense to say "no" to. Clearcutting unowned land is (maybe) something it makes sense to say "no" to. These things may be true, but from this premise does not flow a truism that the central government is either best equipped in terms of knowledge or incentive to utter yon nay.

The 16th might be seen as a leader for the lightning strike that was the 18th, particularly considering Wilson and Harding's peccadilloes, but its effects have proven more pernicious than prohibition. Consider that there is no accidental language in the tax code. Every exemption, every credit, every deduction, every sentence, paragraph, comma jot and tittle represents some vested interest enjoying a nice "conversation" with elected officials on or about the vicinity of Capitol Hill. Instead of turning their talent towards increasing the scope and volume of euvoluntary exchange, firms have every incentive under the 16th to influence tax policy to throttle upstart challengers and jigger the sluices of wealth their way. The amount of political kayfabe needed to support this is perfectly astounding, no matter what your moral axis. That the tax authority has branded itself as being on the right side of the oppressed classes as well as a force for civilization is a simply astounding accomplishment.

Simply astounding.

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Do you have suggestions on where we could find more examples of this phenomenon?