James McGill Buchanan, Jr.’s Ph.D. in economics at the University of Chicago was awarded in the summer quarter of 1948. The title of his dissertation was “Fiscal Equity in a Federal State”. From the Milton Friedman papers at the Hoover Institution we have the following transcription of the mimeographed dissertation outline submitted by Buchanan that was discussed in the economics department faculty meeting of October 24, 1947. The agenda of that faculty meeting along with Milton Friedman’s handwritten additions (in square brackets) are included at the end of this posting. The procedure for admission to Ph.D, candidacy is described in a 1949 memo written by Milton Friedman to members of the Department’s Ph.D. Thesis Committee.
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2. Present Procedure
[1949, University of Chicago, Economics]
a. Admission to candidacy. As I understand it, we have no very formalized procedure or requirements. Students typically discuss possible thesis topics with one or more faculty members, construct outlines of the projected thesis, ordinarily get the reaction of one or more faculty members to it, revise it accordingly, and then formally submit the thesis topic and outline to the Department for approval and admission to candidacy. The submitted outline is occasionally extremely detailed, occasionally very general, and is sometimes accompanied by a general statement of objective and purpose, sources of material for the thesis, etc.
[…]
Source: Undated memo (early 1949) written by Milton Friedman to members of the Committee on Ph.D. Thesis Outlines and Requirements from Hoover Institution Archives. Milton Friedman Papers, Box 79, Folder 5 “University of Chicago Minutes, Ph.D. Thesis Committee”.
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Dissertation Outline, James M. Buchanan, October 1947
J. M. Buchanan
EQUITY CONSIDERATIONS IN INTERGOVERNMENTAL FISCAL ADJUSTMENT
I. The Problem —
A. The federal political structure
1. Federalism in political theory. Varying degrees of dual sovereignty. The question of the finality of a federal structure. Is it a final point in political organization or merely a stage in an evolutionary process?
2. The historical development of federalism in the United States. Trends toward centralization and opposing tendencies. The expanding role of government on the whole. The expanding sphere of activity of the central as opposed to subordinate units. Projection of future trends.
3. The case for federalism as a permanent political structure in the United States. Its value as a means of a division of power, as a protection against a tyranny of the majority, etc.
4. Statement of viewpoint on federalism taken in this study.
B. The national economy —
1. The historical development of the expanding scope of the economy. The extension of the market, the trend toward economic centralization, in the sense that the nation has become the unit which defines the area of the allocation of resources.
2. The extent to which the economy is national — increasing specialization, increased resource mobility, etc.
C. Conflicts which arise in the financing of government due to the superimposition of a federated political structure on a national economy.
1. The heterogeneity of the subordinate units of government. Resource heterogeneity. Cultural, social differences. Income disparities leading to differentials in tax burdens and service standards. The basic fiscal inequity inherent in such a structure.
II. A Theoretical Solution –
A. What is fiscal equity in such a structure?
1. Definition and limitation. For present purposes concept narrowed to that of “equal treatment for equals and unequal treatment for unequals”. Abstraction from any attempt to determine equity as between unequals since such a concept not needed for problems considered.
B. Application of the concept —
1. Necessity of benefit calculation for any determination of equity among individuals in separate subordinate governmental units. Difficulties in benefit calculation, aside from special cases. Assumption of per capita general expenditure as best measure of benefit.
2. Definition of the “fiscal residuum” or “net tax” – Net value of services available less net value of taxes paid. Considerations of “government” as the total of all layers in structure, federal, state, and local.
C. Arithmetical Examples –
Examples illustrating possible application of the equity criteria in hypothetical cases. Illustration that “equal treatment for equals and unequal treatment for unequals” will impose geographical financial neutrality upon the individual.
III. A study of Comparative Fiscal Treatment of Similarly Situated Individuals in High Income and Low Income States –
A. Selection of states considered – one with high per capita income, one with low. (Tentatively have selected New York and Mississippi.)
B. Assumptions and abstractions –
1. Assumption of the State-Local fiscal problem as solved or non-existent. Application of criterion to 2-level structure only. State-local considered as one unit. Seek only interstate differentials, not intrastate here.
2. Assumption of money income as measure of economic position. Abstraction from non-pecuniary advantages of geographical location. Individuals considered in similar economic circumstances if money income, pproperty value, same. Physical property same. Family obligations same.
C. Selection of hypothetical individuals to be compared. Determination of income ranges to be covered.
D. Expenditure pattern of individuals considered.
1. Proportion of income saved, spent at various income levels.
2. Distribution of expenditure at various income levels.
3. Property holdings at different income levels.
E. Determination of tax burdens of individuals considered.
1. Examination of tax structures of states in question.
2. Assumptions as to final incidence of state taxes. More than one set of assumptions can be made and results collocated.
3. Tax burden of hypothetical individuals in each income group in each state can be determined by application of assumptions as to incidence to expenditure patterns.
4. Indication that validity of the study does not depend upon validity of the assumptions as to incidence since no attempt is made to compare dissimilarly situated individuals. (Such a comparison will necessarily show in the computation, however, and for this reason the assumptions should be as realistic as possible.)
F. Determination of value of benefits of government service provided —
1. Necessity to use per capita general expenditure as best benefit measure.
2. Use of value input only not value output. Value output will differ as administrative efficiency of state varies.
G. Calculation of fiscal residua of similarly situated individuals considered —
1. Possibility of abstracting from federal taxes and expenditures since similarly situated individuals supposedly treated similarly by federal government.
H. Calculation of the interstate differential in fiscal residua of the hypothetical similarly situated individuals considered.
IV. Existing and proposed attempts at solution.
A. Vertical Integration
1. Examination of the various proposals made to integrate and unify the whole financial structure; plans for realignment of functions, central collection, local administration, complete centralization, etc.
B. Horizontal Integration and Coordination –
1. Readjustment of geographical boundaries, consolidation of non-efficient units. The “regionalism” approach.
C. The grant-in-aid as the adjusting device.
1. The existing structure of grants-in-aid in the United States – a short summary of the more prominent characteristics of the system.
2. Proposals for extension of the system –
a. Further use of the conditional grant
(1) Merits of the conditional grant
(2) Drawbacks
(a) Effects on budgetary independence of subordinate units.
(b) Central direction and interference.
b. The concept of a “minimum standard”
(1) Idea of the “national interest”
(2) Attempts at defining “minimum standards”
(3) Violation of equity criteria
(4) Federal assumption of a function.
D. Realistic Appraisal of Various Proposals from Standpoint of Political and Administrative Feasibility.
V. Policy Implications of the Criterion of Equity Proposed in this study.
A. The practicability of direct application.
1. Difficulty of measurement
2. Political and administrative barriers.
B. Effect of the Acceptance of the Theoretical Validity of the Criterion upon Practical Policy.
1. Early elimination of matching requirements in grant-in-aid distribution.
2. Early abandonment of the concept of “minimum standards”.
3. Broadening of purpose for which grants are made.
4. Further extension of so-called “equalization” grants.
5. Elimination of the idea of “charity” in intergovernmental fiscal adjustment.
6. Greater federal reliance on the income tax as a source of revenue.
C. The proposals of the Canadian Royal Commission and Possible Application of Similar Proposals to the United States.
VI. Possible Objections to the Equity Criterion Proposed and its Policy Implications.
A. Theoretical Objections
1. The central government as the adjusting unit.
2. The inclusion of fiscal treatment by government in the criteria for the optimum allocation of resources.
3. The nation as the economic unit.
B. Administrative Objections.
1. Violation of principle of fiscal responsibility.
VII. Conclusion.
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Department of Economics
AGENDA
Friday, October 24, 1947, at 3:30 p.m. in SS424
I. Students’ Business
A. Admission to Candidacy for the Ph.D. Degree
James M. Buchanan
Subject: Equity Considerations in Intergovernmental Fiscal Adjustment.
Field: Government Finance
Committee: [Blough, chairman, Perloff, Knight]
Henry Woldon Hewetson
Subject: An Examination of the Distance Principle of Railway Freight rate making with references to Canadian Conditions.
Field: [Transportation]
Committee: [Sorrell, Koopmans, Friedman]
[Inserted:
Harriett D. Hudson.
Progressive Mine Workers of America
Committee: Douglas, ch; Nef; (illegible name) Lewis]
Norman Maurice Kaplan
Subject: Models for Socialist Economic Planning
Field:
Committee: [Marschak, ch.; ch. Harris; A. P. Lerner; Friedman
Raymond H. McEvoy
Subject: Effects of Federal Reserve Policies, 1929-36
Field: Money, Banking, and Monetary Policy
Committee: [Mints, Hamilton, Metzler]
Wallace E. Ogg
Subject: A Study of Maladjustment of Resources in Southern Iowa
Field: Agricultural Economics
Committee: [Johnson, Hardin (pol sci), Lewis]
B. Admission to candidacy for the Alternative Master’s Degree (without thesis.)
Raymond H. McEvoy
C. Admission to candidacy for the Regular Master’s Degree
Peter Senn
Subject: Federal subsidization of the Banks
Field:
Committee:
D. Petitions
Guy Black—for permission to substitute work in Mathematics for the regular requirement of a second foreign language.
Keith O. Campbell—for approval to take Political Science as one of the fields for the Ph.D. Degree.
Gershon Cooper—to substitute the following courses in math. for the German language requirement for the Ph.D. Degree: Mathematics 216, 220, and 228.
Bernard Gordon—to substitute a mathematical sequence of Calculus I and Calculus II in place of one of the language requirements for the Ph.D. Degree.
Dale A. Knight—to use Political science as one field for the Ph.D. Degree.
Chih-wei Lee—to take English as the second language.
[John K. Lewis]
II. Encyclopedia Britannica Economic Articles
III. Language requirements for Foreign students.
IV. Report of Master’s Degree Committee, Spring and Summer, 1947
V. New Business
Source: Hoover Institution Archives. Milton Friedman Papers. Box 79, Folder “79.1 University of Chicago Minutes Economics Department 1946-1949”.
Image Source: The Concise Encyclopedia of Economics. Biography of James M. Buchanan.