Part 1 - AL-Tax

International Taxation Handbookneutral, B might be the most transaction cost-efficient governance structure fortaxation.6.3.1.2 State interacts with taxpayers: Relying on bureaucracy togenerate state revenueIn addition to the internal view of a public agency organization, a comprehensiveperspective on bureaucratic governance allows a focus on external transactions –that is, how the interaction is organized between the public agency and its external‘transaction partner’ (here: Taxpayer). While a public agency may offer external contractsfor certain transactions, like for any consumer or firm (spot market purchaseof office furniture, hybrid contracting of regularly recurring transactions such ascomputer purchases associated with frequent maintaining services), it normallyresorts to bureaucratic governance for transactions regarding sovereign administrativetasks such as tax base assessment and tax collection. Taxation is an interactionbetween the taxpayers and the tax authority to generate state budget, and can thusbe deemed ‘bureaucracy’ (mode B). Under such TCE perspective, the taxpayer ishierarchically bound to bureaucratic tax mechanisms which the state imposes tosafeguard its tax base.TCE interprets a public bureaucracy ‘as a response to extreme conditions of bilateraldependency and information asymmetry’ (Williamson, 1999, p. 337). Instead ofprivate ordering, public bureaucracies provide safeguards against contractual hazardsbeyond M, X U , X C , or F. As mentioned above, factors why – in a world ofdomestic tax cases – bureaucracy may govern these hazards more efficiently thanmarket-like mechanisms include probity (Williamson, 1999, p. 338) and, in taxation,neutrality of treatment. For example, the sovereign state has incentives to treattaxpayers with neutrality, in accordance with the tax code and its revenue procedures.Otherwise, in a constitutional state, administrative unpredictability couldtrigger lawsuits against the tax authority and the taxpayer would have incentivesto shift his tax base into another tax jurisdiction (tax emigration) or tounderperform.Terms like probity can be paraphrased with concepts such as trust, relational contracting,corporate culture, or influence aspects. What probity has in common withthese terms is the impact from transaction cost optimization on the governance ofcontractual hazards h. Because taxation requires a high level of probity, and thislevel may be best endured through a public agency, equitable and fair taxation maybe efficiently coordinated through bureaucratic interaction with the taxpayer: Thesovereign state (public agency) generates its budget by means of bureaucratic ex-post128