Abstract - Omission of collective choice prevents the analyst from understanding the central role of political equilibrium. To create a framework that places tax policies in a broader equilibrium context we must model the underlying collective allocation mechanism and use it as a starting point, whether we do empirical work explaining observed features of tax systems or whether we engage in research on tax efficiency. A broader perspective of this nature also forces us to re-examine well-known concepts, such as tax expenditures, flat taxation, and the marginal efficiency cost of public funds, and to question and reinterpret some of the conclusions that have been reached in the literature related to these concepts.

INTRODUCTION

Omission of collective choice analysis causes us to miss a concept that is fundamental to the understanding of taxation, namely, political equilibrium. Outcomes in the public sector are a consequence of the balancing of political forces taking place in the context of resource use in both the private and the public economy. If this is acknowledged, we must create an explicit link between collective choice mechanisms describing political equilibrium and the determination of tax policies.

We show in this paper how the perspective on tax research is changed if such a broader approach is adopted. We start by considering collective allocation mechanisms that can serve as a basis for positive tax analysis. This is followed by a discussion of how an explicit acknowledgment of political equilibrium affects the normative evaluation of tax systems and tax policy proposals.