The whole practice of public finance has been developed in an endeavor to outwit the taxpayer and to induce him to pay more than he is aware of, and to make him agree to expenditure in the belief that somebody else will be made to pay for it.

—Friedrich Hayek. Law, Legislation and Liberty, Volume 3, 1979.

One of the major drawbacks of representative democracy is its failure to adequately balance taxes and spending. There are three main problems:

  • ‘Beggar thy neighbor’ syndrome—this is the process whereby the people tax each other mercilessly in order to pay for ‘free’ handouts. The problem is not a lack of virtue in the electorate, but rather the inherent defect of representative democracy whereby the politicians use their control of the purse strings to bribe the electorate.
  • Those doing the spending in a democracy are not limited to a budget. Whenever people are given an unlimited amount of money, they will spend irresponsibly. This applies in government as much as it does in business, charity, or personal finances.
  • Those doing the spending in a democracy do not own the money. People always tend to spend lavishly when it is not their money.

The solution: appropriation by referendum

This would seem to require that the principles on which the burden is to be shared by the individuals be determined in advance, and that whoever votes in favor of a particular expenditure knows that he will have to contribute to it at a predetermined rate and thus be able to balance advantages against costs … a method of taxation that encourages the belief that ‘the other fellow will pay for it’, together with the admission of the principle that any majority has the right to tax minorities in accordance with rules which do not apply to the former (as in any overall progression of the tax burden), must produce a continuous growth of public expenditure beyond what the individual really desires.

—Friedrich Hayek. Law, Legislation and Liberty, Volume 3, 1979.

The solution is taxation by referendum. Under such an arrangement, voters will vote for the percentage tax they wish to pay in the coming year. Each October the electronic ballot for the following year’s taxation levels would look like this:

Local Tax Rate ☐ %
State Tax Rate ☐ %
Federal Tax Rate ☐ %

The local, state, and federal tax rates would be determined by averaging the votes across each jurisdiction. Once tax rates are determined in such a way, the legislators will then have a fixed budget within which to work. By subjecting everyone—rich man, poor man, even the welfare recipient —to the same tax rate, this flaw in democracy would be mended. Each voter will have a natural incentive to keep taxes as low as possible. The poor majority will no longer seek to plunder the rich, whose capital is the wellspring of the general prosperity.

Some might fear that such a system will result in everyone voting 0 percent. However, that problem is not evident in those town hall meetings where the voters tax themselves through a show of hands. While there may be teething difficulties, the people have no incentive to ruin themselves—rather, they tend to be irresponsible only when their responsibilities are taken from them.

Spending by referendum

Once a system of taxation by referendum is established, the next logical step is to implement spending by referendum. Thus for example, each October the electronic ballot for the following year’s budget will look like this:

Defense ☐ % ↑ ↓
Courts ☐ % ↑ ↓
Police ☐ % ↑ ↓
Roads ☐ % ↑ ↓
Child protection ☐ % ↑ ↓
Total 100%

Clicking the up or down arrows will increase or decrease the percentage of the entire budget allocated to that department; the figures for the other departments would automatically increase or decrease to compensate. The result will be determined by the average of all the votes.

Those voters who opt to do so should be able to perform a similar operation on departmental budgets, and budgets within departments, down to the smallest sector budgets. Those voters who chose not to vote in these lower denominations would be deemed to have voted for the status quo from the year before.

This approach will mean politicians could no longer curry the votes of different sectors of the community by bribing them. In the future, anyone seeking money from the public treasury will have to convince the owners of the money of the utility of their proposed project.

This article is an extract from the book ‘Principles of Good Government’ by Matthew Bransgrove