July 19, 2012

Two Systems of Public Finance: Entrepreneurial and Parasitical

  • Richard Wagner

    Distinguished Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics
  • Steven Hanke

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Expositions of the theory of public finance mostly assume that taxation must be the primary instrument for generating revenue. This assumption is neither historically accurate nor theoretically necessary. Rather, it universalizes an institutional arrangement that is particular to the nation-state, where taxation is the prime instrument of public finance. In contrast to this system of parasitical public finance, we explore a system of entrepreneurial public finance within a setting of city-states where attraction and not compulsion dominates public finance. Cities are corporate bodies which can be organized under diverse institutional arrangements. We use the United Arab Emirates to illustrate our analysis of divergent systems of public finance.

Find the working paper at SSRN.com.