| This dissertation analyzes tax policy in a world with structure induced equilibrium. The theoretical section of this dissertation discusses the nature of structure induced equilibrium, SEE. In particular I analyze what is actually needed in order for SIE to exist. I then explain why SIE leads to a ratchet effect in public finance.; The empirical section of the dissertation consists of a case study in the public finance ratchet effect. I look at the ratchet effect during the Civil War and its effect on income taxes. In the case of the U.S. Civil War taxes, it was not the voter, but interest groups that initially organized tax legislation, resulting in raised tariffs and the introduction of an income tax. After the Civil War, Congress, under the influence of interest groups, kept the tariff high but repealed the income tax. I use an analytical narrative to explain the actual process that interest groups use to introduce and repeal the income tax. I then use logistic regression on Congressional Roll Call votes to empirically test my results.; The third essay focuses attention on the difficulty of real tax reform or even optimal tax analysis. Regardless of how efficient a new tax might be, change is often blocked by institutional constraints. A different tax might lead to higher social welfare and any political entrepreneur who institutes such a reform would be rewarded. But the constellation of rules that make up institutions such as cloture, amendments, and jurisdiction all keep tax policy stable. These rules prevent vote cycling, legislative defection, and of course lock in policy including tax policy. The struggle arises because these rules have been implemented by groups whose interests are best served by the status quo. Moreover, the process that led to these rules implies that tax policy is most likely at a local rather than global maximum.; This accounts for the difficulty of instituting tax reform and suggests that optimal tax theory needs to broaden its scope. While minor adjustments to the tax code are encouraged because they allow for rent extraction, real change is highly unlikely. For example carbon taxes are popular with a variety of groups, yet despite prolonged pressure to institute them they seem to be going nowhere. Flat taxes might be welfare maximizing. But the interest groups that currently benefit from the tax code have written the rules. There is no easy way to credibly pre-commit to paying them off if there is a policy change. Moreover, tax reform and even simple tax optimization lead to deadweight losses from haggling over who will win and lose from both the tax and expenditure sides. Before those taxes come into being, interest groups will manipulate procedural rules. (Abstract shortened by UMI.)... |
