This past Friday, I gave the “Presidential Address” at the Southern Economic Association (SEA) in New Orleans, on the topic of what President Obama’s reelection means for the future of liberty in the United States. As a classical liberal, my outlook is best captured in one simple proposition: a system of sound governance needs to promote a mixture of individual liberty and private property in order to allow individuals to maximize the gains from individual effort and social cooperation.

A strong government that can protect these rights must, of course, backstop the market system by collecting tax revenues that are spent on the public goods that markets cannot easily or efficiently supply, such as defense and social infrastructure. The use of state power always opens up the path for general abuse because large doses of government discretion allow all political forces to secure factional gains that result in overall social losses. The central challenge for government is to incur minimum political distortions while allowing taxes to raise the revenues needed to discharge essential government functions.

Taxation vs. Factions

There are two key methods by which to constrain the political risks of faction. The first is to adopt only a single instrument of taxation—most likely an income or consumption tax—in order to reduce the risk of political intrigue. There is, for example, no place under a sound system of taxation for special excise taxes like the 2.3 percent tax imposed on medical devices to help fund ObamaCare. The second is to make the system of taxes durable over time, so that the form and incidence of the tax is not subject to constant maneuvering. Our fiscal cliff has arisen because tax policy is revised every two years, provoking political crises.

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