This Article examines the financing dimension of private choice, with a focus on Congress’s taxing and spending decision-making processes. The Article begins with an overview of the financing and performance dimensions of privatization decisions, followed by an analysis of how taxation relates to both dimensions. Private choice can be financed individually, that is, paid for by an individual’s own resources, facilitated by general tax reduction. Alternatively, private choice can be financed collectively by using tax revenues (or borrowed funds) to pay for privately provided goods and services. The tendency in political debate to conflate those two forms of financing, as well as the failure to distinguish between financing and performance, obscures important decisions about private choice and the government’s role in managing or monitoring collectively financed activities.

Congress coordinates its taxing and spending decisions through the budget process, collectively determining what will be financed and performed through government and what will be left to private choice. The courts generally defer to the taxing and spending decisions made by Congress. Nevertheless, in the process of developing this highly deferential approach, the U.S. Supreme Court historically has drawn distinctions between taxes and other means of paying for or regulating the production of goods and services. Although it can be quite difficult to distinguish “taxes” or “revenue raising” from “user fees,” “prices,” or “penalties,” they are not constitutionally interchangeable. When the Court has interpreted express limitations on Congress’s taxing power, it has drawn distinctions similar to those drawn in the privatization literature between individual and collective financing. These doctrinal distinctions reflect the democratic values inherent in Congress’s taxing and spending powers.

Next, drawing from tax scholarship on tax expenditures, the Article develops the argument that general tax reduction and targeted tax incentives differ in their approach to financing. Targeted tax incentives subsidize certain legislatively favored activities and, therefore, comport with the pattern of privatization typically followed in the United States of retaining collective financing but delegating performance to the private sector (as in government contracting or voucher programs). Collective financing keeps resources under some type of government control, with collectively defined goals achieved through the use of either public or private producers.

The Article concludes with a discussion of accountability issues with regard to both financing and performance. Administrative lawyers and scholars are engaged in studying new ways in which regulation, contracts, and contract monitoring may respond to the accountability problems created by increased “contracting out” or privatizing of government services. A parallel effort to study ways in which increased monitoring of tax incentives can be achieved needs to be undertaken. Tax incentives generally do not involve negotiated relationships between government and private contractors, but typically involve tax reporting to the Internal Revenue Service and oversight jurisdiction by the tax-writing committees. The delivery of subsidies through the tax system can mask governmental funding levels and allocations and obscure accountability for outcomes being funded. The use of tax incentives as an alternative to discretionary spending by the government serves privatization goals through their use of market incentives and private choice. How to achieve greater political accountability for both the financing and performance of tax incentives remains a central challenge. The Article ends with suggestions for incremental ways to achieve such increased monitoring through budgetary and oversight reforms.

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