[BLANK_AUDIO] Let's have a look at this chart. Suppose that there are two types of governments that can run a tax system. And, as before, we distinguish between benevolent governments and predatory government. In other words, Leviathan. Let's first assume that the government is benevolent. Okay. Well, in that case, suppose that the government has to make a choice between these two markets. As you can see, and this is a familiar picture, we saw it before when we were discussing the Ramsey rule. And at that time, our conclusion will be that if we have a government... And that was an assumption made here implicitly, we didn't make it explicit, now we do. But if we are 100% certain the government is acting in public interest, and the government's only objective is to collect a reasonable amount of revenues, then it has to collect this revenues from the government with less elastic tax base, in other words, from this market, from the market with less elastic tax base. Getting back to this picture, this conclusion still holds. We have a choice between these two markets: this one is highly elastic, this one is highly inelastic. If government is benevolent, then it's no brainer. The government should tax this market and leave alone this one because in that case there would be a considerable deadweight loss. In that case, there would be no deadweight loss. The society would suffer far less, lesser losses in this case than in this one. And, remember, I explained to you why low elasticity is good for choosing taxes. Simply because in this case, people will be finding refuge in less taxable areas of activity. And precisely for that reason, the tax base is elastic. In that case, now refuge is available and here, therefore, distortions to economic behavior caused by taxes will be much higher than here, and for that reason we prefer this option to this one. Then there will be much fewer distortions in this case. But see how this predictions or these prescriptions, if you like, would be turned upside down if the government is Leviathan. And this is an observation made several decades ago by another Nobel Prize winner James Buchanan, an american economist who first drew attention of the professional community to the threat of Leviathan. Suppose that the government is Leviathan one, what's the difference? Benevolent government's role is to collect a certain amount of public revenues and to spend this money for the needs of society. The objective of the Leviathan government is to maximize tax collection without much concern and much regard about how this money will be used. And the Leviathan government acts as a profit maximizing monopoly. And the maximum tax collection available from a certain market will be different depending, of course, on the demand elasticity, on the tax base elasticity. From the highly elastic market, the opportunities to collect taxes are limited. Precisely for the same reason that this highly elastic market was less suitable for revenue collection. But this time what was a problem, a liability for the benevolent government, becomes an important plus. There is simply not enough room for Leviathan government to cause a lot of damage on the highly elastic market because if the Leviathan government exceeds what is appropriate for tax collection purposes, then people will find refuge from this excessively taxed market elsewhere. So, do lock a Leviathan government to markets with high elasticity. If, however, you were reckless enough to allow a Leviathan government to operate in a low elasticity market, as you see, the revenue collection would be expanded dramatically. And there would be very few market limits to the appetites of the Leviathan government. And the ability for this government to extract wealth from the society would be much broader and the damage caused by this government would be much higher. And, therefore, if there are serious reasons to expect that governments will not be sufficiently accountable to the society, will not be sufficiently controlled by the society, if there are high odds that the government will be a Leviathan government rather than the benevolent government, and if you want to design your tax system taking into account this, then your choice will be less efficient taxes. Unfortunately. It might be appropriate in some circumstances to prefer taxing high elasticity markets to taxing lower elasticity markets. And this is another political restriction on the choice of tax systems which, as we see, can dramatically effect the choice of taxes. Well, I'm about done with our analysis in this lecture of tax systems. I introduced to you, necessarily briefly, sometimes unfortunately superficially, but still introduce to you the key incentives, constraints, and concerns which explain the choice of tax systems around the world. They are applicable in different combinations in different countries and jurisdictions. And the variety of tax systems around the world can be explained by different combinations of these incentives, concerns, and constraints. And, of course, they reflect specific conditions and features of different countries such as culture, tradition, structure of economy, political economy, so on and so forth. Thank you. [SOUND]