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Born in Koenigstein, Germany, Musgrave was educated at Heidelberg (where he obtained a Diplom Volkswirt in 1933) and at Harvard University (where he obtained his Ph.D. in 1937). After serving at the Federal Reserve System in Washington, he held appointments at a number of leading North American universities and ended his formal teaching career at Harvard, where he was Professor Emeritus. He was an economic adviser to a number of governments, headed foreign tax commissions, and served as editor of the Quarterly Journal of Economics.

Richard Musgrave is best known for his outstanding treatise The Theory of Public Finance, published in 1959 at a time when social expenditures were growing rapidly throughout the industrial world, and when poverty and social justice had become primary policy concerns. This book, which is comprehensive, has served as a fundamental source for scholars and as a teaching reference. In it Musgrave summarizes and extends his original contributions to expenditure theory and the theory of taxation, provides an extensive review of the classical literature in public finance, and includes a thorough discussion of fiscal and monetary policy developed from a Keynesian perspective. One of the great strengths of the book is Musgrave’s broad knowledge of the early European masters of public finance, notably Wicksell and Lindahl. By reviewing the classical writers and relating his theory of the public household to their work, Musgrave built an essential bridge between earlier ideas and the development of modern public goods theory.

Musgrave made significant contributions to virtually all areas of public finance. He wrote on the theory of fiscal federalism and revenue sharing, international aspects of taxation, alternative measures of income tax progressivity, land value taxation, the theory of fiscal sociology, and the effects of tax policy on private capital formation, as well as on various aspects of debt and monetary policy. His most original and lasting contributions can be grouped into two categories: taxation theory, which includes three major contributions, and public goods theory, in particular his theory of the public household.

One of Musgrave’s most distinguished contributions to taxation theory is his joint paper with E.D. Domar on the effects of taxes on risk taking (1944). The authors show that taxes on capital income will not necessarily decrease investment in relatively risky ventures once the loss offset provisions of the tax and its income effects are accounted for. In fact, it is quite likely that risk taking will be encouraged by an interest income tax. This article ranks with the half-dozen most influential articles on taxation written since the mid-1950s, and it represents the first application of the theory of choice under uncertainty to taxation. Its conclusions have proved to be quite robust to more general formulations of the theory of risk taking.

Musgrave’s second contribution to taxation theory is his theoretical and empirical work on tax incidence. He has developed most of the general concepts currently used in incidence analysis, and, in one of the first general equilibrium analyses, established the fundamental equivalences between direct and indirect taxes and between general and specific factor taxes. These contributions clarify a much confused issue: whether general excise taxes are shifted forwards to purchasers of taxed commodities or backwards to providers of factor services. They also established the importance of both uses and sources aspects of incidence theory.

Musgrave’s work on the allocation of tax burden (1951) to different income groups is a basic contribution to applied analysis and has been the starting point for all subsequent studies on tax burdens by income classes. More recently (1974) he refined this earlier work and covered the distributive aspects of expenditures as well as taxes. In another important study, The Shifting of the Corporation Tax (1963), with M. Krzyzaniak, Musgrave developed the first econometric estimates of incidence and concluded that the corporate profits tax is shifted forwards, a finding which gave rise to a large literature.

Musgrave extended and refined the normative theory of equitable taxation and its implications for income taxation and the concept of horizontal equity (1959, ch. 8). Later, in 1976, he broke new ground by introducing the concept of equal options as the basis for horizontal equity. Within this framework, two persons are considered to be in equal positions and should be treated equally if they face the same options. Thus, two persons with the same present value of lifetime earnings would be considered equal. One of the important insights of this concept is that under certain assumptions a consumption-based tax system is more equitable than an income tax system: the first treats equals equally while the second discriminates against persons who save relatively more.

The theory of the public household, Musgrave’s unifying perspective on public goods, has provided the basis for many of his insights into that fundamental topic. This theory distinguishes between three branches of government – the allocative branch, which provides for social goods and deals with related questions of efficiency, the distribution branch, which modifies the distribution of income as determined by market forces and inheritance, and the stabilization branch, which is concerned with unemployment and overall economic stability.

He stresses that the failure to distinguish between the three different objectives of budget policy will involve unnecessary conflict and inefficient policy design. For instance, different voters may agree on the objective of fiscal stabilization but may fail to enact a proportional cut in taxes in recession if the proposals to combat recession will increase expenditures or change the distribution of income. Hence, one of the practical principles to emerge from the three-budget classification is that expenditure levels and the distribution of income, or tax shares of individual groups, should be determined independently of stabilization objectives. Similarly, the distinction between allocation and distribution leads to the principle that redistribution should be implemented primarily through a tax-transfer process. This will avoid inefficient increases of public expenditures in the name of progressive objectives.

The distinction between allocation and distribution has acquired increased practical significance as much of the expansion of the public sector has consisted of increased transfer payments: Social Security and publicly financed medical care. Also, in a wide variety of policy areas, from the regulation of the prices of energy resources to efficient congestion-pricing of urban highways, the conflict between allocation and distribution has led to poor policy design, as he predicted. Compensation systems are needed to offset the redistributive effects of efficient allocation policies.

The value of the distinction between allocation and distribution has been enhanced by the work of Robert Nozick and John Rawls on social justice. Nozick has restated and extended John Locke’s doctrine that one is fully entitled to the fruit of one’s labour. Rawls developed a very different theory based on a communal claim to the output of high-ability persons. However, the claim structure is voluntarily agreed upon through a social compact, as risk-averse individuals, not knowing their future position, agree behind a veil of ignorance to share their income. This contractual approach to distribution is fully consistent with Musgrave’s separation between the allocation and distribution branches.

Musgrave distinguishes between primary and secondary redistribution. Primary redistribution is determined by the social rights that entitle the individual to some share of the social product based on membership in the community, rather than on property ownership or labour supplied. Secondary redistribution is voluntary giving that occurs either through private charities or collective provision. Secondary redistribution is Pareto optimal in that the donor derives more satisfaction from providing the gift to the poor than from additional personal consumption.

The mix between primary and secondary redistribution will vary across societies, according to differences in social values. Also, some social rights, or primary redistribution, may be provided in part in the form of goods and services, such as education, training programmes and medical care. This possibility blurs the separation of allocation and distribution functions.

The primary shortcoming of the distinction between allocation and distribution, however, is not the existence of transfers in kind and the subsidization of certain goods, which Musgrave has classified as merit goods (1957, 1959). As stressed by Samuelson, the fundamental issue is that numerous allocations between social and private goods are Pareto efficient, and the choice of an efficient allocation, a task for the distribution branch, has allocative consequences. In a planning solution, then, allocation and distribution are decided simultaneously, not separately.

Musgrave agrees to the formal correctness of this argument but he argues that this approach implicitly assumes that the planner knows individual preferences, and that the question of distribution is dealt with de novo. If, however, the distribution of income is determined primarily by market forces and preferences are not known, a pricing rule or voting rule that induces preference revelation must be designed. The determination of the pricing rule is the allocative function of government. The determination of money income, in conjunction with the pricing rule, is the distributive function.

When considered from a broader perspective the separation of budgetary functions into allocation and distribution branches has been invaluable, both as a normative theory and as a description of the way public agencies operate. Experience shows that it is very important to develop coordination between branches of government. Also, Musgrave’s three-branch theory clarifies many positive issues, such as the causes of large foreign trade deficits and the demise of central cities in metropolitan areas, as well as the design of policies to deal with these trends.

The establishment of a framework for the systematic solution of fiscal problems is Musgrave’s most significant contribution. His work combined theory, institutional and historical information, a deep understanding of prior work and empirical testing. Like a number of other outstanding economists educated during the turbulent 1930s, he emphasized the practical and concrete applications of academic research in the belief that ‘intelligent conduct of government is at the heart of democracy’, and until the end of his life was an active commentator on policy issues. A lovely delineation of his views, along with a contrasting perspective, is found in Buchanan and Musgrave (1999); see also his review of the evolution of ideas on fiscal policy (1987).

See Also

Selected Works

  • 1939. The voluntary exchange theory of public economy. Quarterly Journal of Economics 53: 213–237.

  • 1944. (With E.D. Domar ). Proportional income taxation and risk taking. Quarterly Journal of Economics 58: 388–422.

  • 1948. (With T. Thin ). Income tax progression. Journal of Political Economy 56: 498–514.

  • 1951. (With J.J. Carrol, L.D. Cook, and L. Frane). Distribution of tax payments by income groups: A case study for 1948. National Tax Journal 4: 1–53.

  • 1953. On incidence. Journal of Political Economy 61: 306–323.

  • 1957. A multiple theory of budget determination. Finanz Archiv NS 17: 333–343.

  • 1959. The theory of public finance: A study in public economy. New York: McGraw-Hill.

  • 1963. (With M. Krzyzaniak ). The shifting of the corporation tax. Baltimore: Johns Hopkins University Press.

  • 1974. (With K.E. Case, and H. Leonard). The distribution of fiscal burdens and benefits. Public Finance Quarterly 2: 259–231.

  • 1976. ET, OT, and SBT. Journal of Public Economics 6: 3–16.

  • 1987. A brief history of fiscal doctrine. In Handbook of public economics, ed. A. Auerbach and M. Feldstein. Amsterdam: North-Holland.

  • 1999. (With J. Buchanan). Public finance and public choice: Two contrasting visions of the state. Cambridge, MA: MIT Press.