Australian Federalism in James Buchanan’s Early Work on Fiscal Equity

Abstract

James Buchanan, one of the founders of public choice theory and constitutional economics, began his career studying fiscal federalism in the doctoral program at the University of Chicago. This paper explores Buchanan’s early interest in Australian experiences with federation and intergovernmental grants as a guide to fiscal federalism in the United States. In his dissertation, Buchanan cited Australia in his arguments against the consolidation of the American states into larger regional governments. He also drew lessons from the early years of the Commonwealth Grants Commission for the intergovernmental grants that he proposed for the United States.

Keywords:

• Buchanan
• federalism
• Commonwealth Grants Commission
• Chicago School

Disclosure Statement

No potential conflict of interest was reported by the author.

Acknowledgement

This paper benefited from the comments of two anonymous referees. I am grateful to Peter Boettke for sharing a scan of Buchanan’s 1947 term paper, ‘A Theory of Financial Balance in a Federal State’.

Notes

1 The Canadian Royal Commission on Dominion-Provincial Relations made plans for unconditional intergovernmental grants, but no equalizing grants had been implemented.

2 The efficiency case for intergovernmental grants emerged to a large extent as a part of Buchanan’s broader response to Charles Tiebout’s (1956) theory of local expenditures.

3 See http://www.irwincollier.com/chicago-henry-simons-last-course-fiscal-policy-1946/ for Simons’s syllabus. Canadian federalism is discussed in Hansen and Perloff (1944), which was assigned as a text in Simons’s class.

4 For Buchanan’s dissertation outline, see http://www.irwincollier.com/chicago-james-buchanans-dissertation-outline-1947/.

5 See ‘Notes for Lecture 21 February 1995’, James Buchanan Papers, George Mason University.

6 For Buchanan’s dissertation outline, see http://www.irwincollier.com/chicago-james-buchanans-dissertation-outline-1947/. Simons likely would have served on the committee if he had not passed away.

7 Buchanan’s less frequent citation to Adarkar’s (1937) article on Australian fiscal federalism focuses on Adarkar’s view that the purpose of grants is not to affect population flows. This was in contrast with Buchanan’s position that one of the purposes of grants was to reverse inefficient concentration of the population in high-income states.

8 Buchanan was primarily interested in the fiscal organization and fiscal implications of regions, but the cultural unity of American regions (e.g. the West or the South) was at least as important to the regionalists themselves.

9 Alaska and Hawaii were admitted to the Union in 1959, over a decade after Buchanan finished his dissertation.

10 Some Americans, most notably Marion Crawford Samuelson (1939), sided with the Australian economists who supported the tariff. See Paul Samuelson (1981) for a retrospective account of the exchange.

11 Buchanan (501948, 185–7) argues that geographically discriminatory personal income taxes are in theory preferable still to unconditional grants, because they can correct differences in states’ treatment of equals. However, geographically discriminatory taxes are typically disallowed (and unconstitutional in the United States). The taxes are ‘practical but not practicable’ (Buchanan 501948, 187). Notably, Buchanan does not object to geographically discriminatory personal income taxes on the grounds that it would nullify state policy decisions.

12 General Revenue to States, Raw Data Table, https://www.cgc.gov.au/about-us/fiscal-equalisation.

13 Queensland became a claimant state in 1971.

14 Non-claimant states received income tax reimbursement as well, although they are not included in Figure 1. See General Revenue to States, Raw Data Table, https://www.cgc.gov.au/about-us/fiscal-equalisation.

15 Buchanan’s discussion of the Australian tariff, discussed above, similarly relied only on articles in the Economic Record from the 1930s (Piesse 1935 and Reddaway 1937).

16 Greenwood’s ([1976] 1946) book on Australian federalism, which is cited by Buchanan (1948, 1950), provides an extraordinarily detailed account of the conflict between the claimant states and the CGC over the issue of disabilities and penalties up to the elimination of penalty assessment in 1945. However, Greenwood does not describe the end to the penalties, presumably because the alteration in CGC practice occurred too close to the publication of the book to be included.

17 Buchanan’s objection to the Commission’s use of social service expenditures as a proxy in grant calculations is somewhat ironic since he separately pointed out that in the United States per capita income, the ‘best single measure of fiscal capacity’, had a ‘strong positive correlation’ (Buchanan 501948, 174) with measures of public service expenditures (primarily social services).

18 For more information on Buchanan’s relationship with Harvey Perloff, see Kuehn (2021).

19 Buchanan (501948, 182) does concede that the organic state has some methodological usefulness and is ‘appropriate in some areas of study if the proper qualifications are made’, although he does not elaborate on these cases.

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Daniel Kuehn

Daniel Kuehn is a Senior Research Associate in the Urban Institute's Income and Benefits Policy Center. His research at the Urban Institute focuses on apprenticeship and job training. His research in the history of economics focuses on the lives and work of James M. Buchanan and G. Warren Nutter.