A Congressional Control Model of Treasury Revenue Collection

Abstract

Economic analyses of government's taxing powers generally have been conducted in an institutionless vacuum. Government frequently is viewed as a benevolent dictator that conducts tax policy with an eye toward stabilizing the economy, or imposes taxes simply for the purpose of financing the optimal amount of government expenditures. Recently, a few studies have replaced the benevolent dictator with a view of government as a self-interested organism that seeks to maximize revenue.' Regardless of the details, in all these cases the single decision maker attempts to achieve a single macro objective by establishing a tax structure and then, presumably, collecting the tax proceeds. Implicitly, these studies assume that government will coordinate the collection of revenue in a way that reinforces the intent of any tax change. This allows the analyst to ignore the collection process completely. Because the tax collection agency is subsumed under the general rubric of government, a distinct theory of tax collection does not emerge. This paper attempts to develop a positive theory of tax collection in a democratic setting, where tax policy is an outcome of actions taken by a government consisting of bureaucrats and politicians. The bureaucrats of relevance in this case are members of the treasury, and the politicians are members of a legislative body. An important feature of this analysis is the formal separation of the act of setting tax rates from the act of collecting the revenues. We construe the emergence of tax rates, or the tax structure, as a consequence of competition among political actors in the legislative arena. Once this structure has been established, a separate government body, the treasury, will devote resources toward the