It is in answer that Buchanan’s “Virginia” public choice theorists have introduced the importance of constitutional rules. Since they are concerned with US political institutions, they have used the artifact of the social contract to ask, in the words of Buchanan and Geoffrey Brennan, “Would citizens voluntarily agree to allow the government to exercise power quite unreservedly, or would they rather seek to impose constraints on the behavior of governments?” ( The Power to Tax). Adopting Knut Wicksells’s famous unanimity rule for social choice, as an idealized benchmark to determine “that all governmental actions represented genuine ‘improvements’ (or at least no damage) for all persons, as measured by the preferences of the individuals themselves” (page 6), Buchanan and Gordon Tullock, in their The Calculus of Consent,derived constitutional fiscal rules for the real world where — because of transactions costs and free rider problems — such unanimity will have to be traded off for “work ability in political processes”.
Though the public choice framework was developed by Buchanan and his associates explicitly for the particular political arrangements of the US, the logic of how a revenue‐maximising sovereign could be restrained to only take enough to provide the essential public goods is common to all political systems. In The Political Economy of Poverty, Equity and Growth (co‐authored with Hla Myint), I had developed a whole range of models applicable to various political configurations, with the revenue‐maximizing sovereign being the “predatory state”. This is an obvious designation for absolute monarchs and dictators. But on the “median voter” theorem for democracies of the political scientists, even the US and Indian majoritarian democracies will be predatory states — with the predator being the median voter.
It would take me too far afield to detail the fiscal constitution that Buchanan derived in his various works, using the framework developed in The Calculus of Consent to restrain Leviathan. But it may be useful to outline some that are of relevance in the current policy debates in India and the US.
Taxes on capital (including inheritance taxes currently being advocated in India) — unlike taxes on current flows, of income and consumption, which can be avoided by appropriate actions on the part of taxpayers — are levied on the outcome of past decisions of taxpayers, which by and large cannot be undone to avoid the levies. In the pre‐constitutional state of nature, the citizen would want to guard against this by not granting the government the power to levy taxes on capital.
The same argument applies to government borrowing, which also allows governments to appropriate current resources against taxes on future incomes. With uncertain tenure, predatory governments have no incentive to resist such extraction of future resources for their current purposes. Balanced budgets and restrictions on the government’s power to borrow except in exceptional circumstances — like wars and depressions — would also be part of the fiscal constitution. These are very much the principles of Gladstonian finance.
A collectively financed safety net “to prevent the possibility of [the individual] falling into dire poverty in some unpredictable periods in the future” (The Calculus of Consent; page 193) would also be part of the fiscal constitution. To ensure that bureaucrats, in fact, make the desired transfers to the poor, rather than expand the welfare bureaucracy, transfers in kind would be limited, and the public provision of services to the poor that could be provided by the private sector would be prohibited, and the poor would be empowered to purchase by state‐provided vouchers (as is proposed in India by the Aadhaar scheme). Non‐monetary transfers for the consumption of specific merit goods, such as education and health, would also be provided through vouchers.
I hope this is enough to show that Buchanan’s work, apart from its theoretical innovations, remains powerfully relevant for the most important problem of economic policy: how can Leviathan’s fiscal privileges inherent in a government’s power to take, and give to whom it chooses, be limited? It is a question that continues to haunt the Indian polity, and for which reading Buchanan remains essential.