Tax/compensation schemes: Misleading advice in a rent-seeking society

The central message of this paper was captured by Kipling when he wrote of the Dane's conquest of his country more than a thousand years ago. He added to the passage at the head of the paper: qu]And that is called paying the Dane-geld; But we've proved it again and again, That if once you have paid him the Dane-geld You never get rid of the Dane. It is wrong to put temptation in the path of any nation, For fear they should succumb and go astray; So when you are requested to pay up or be molested, You will find it better policy to say: — ‘We never pay anyone Dane-geld, No matter how trifling the cost; For the end of that game is oppression and shame, And the nation that plays it is lost!’ (Kipling, 1940: 717) An equally important auxiliary message of the rent-seeking literature also suggested by Kipling's work is that constitutional checks on government economic powers are necessary in order to prevent ‘wasteful’ attempts by competitors to use the unchecked redistributive powers of government. By applying rent seeking analysis to consideration of a conventional policy-based solution to protective regulation — tax/compensation schemes — we have demonstrated once again the need for accompanying policy proposals with renewed constitutional checks on government's regulatory powers. Without such constitutional checks, the presumed solution may be a part of the problem. Of course, the needed constitutional check on government's powers may be impossible, which means that the time devoted to developing a policy solution, isolated from constitutional checks, may add to the waste. Shifts in methodological perspectives have a way of unsetting firmly held policy conclusions. As demonstrated in this paper, this is especially true of the rent-seeking and constitutional methodological perspectives. This happens mainly because the analytical methods of these emerging paradigms introduce new, heretofore unconsidered, factors that influence policy outcomes. In the case of tax/compensation proposals, the rent-seeking incentive structure has been largely ignored in drawing conclusions concerning their political saleability. These proposals have implicitly assumed that once the tax/compensation program has been institutionalized, government is effectively constrained from affording the bought-out industry and other industries the same opportunity to be bought out again and again. A truly effective tax/compensation scheme would be one that would reestablish the supremacy of constitutional prohibitions against protective regulation. Copyright Martinus Nijhoff Publishers 1986