Summary and conclusions
A measure of waste from the competitive rent-seeking activity of special interest groups in federal, state and local budgets was calculated over the period 1900–88. This period in U.S. fiscal history is characterized by constitutional changes that have made for more transparency in governmental fiscal activities and for greater diffusion of taxes. The XVI Amendment to the Constitution created the progressive individual income tax (the corporate income tax was judged to be an excise tax in 1909 and passed the test of constitutionality). High marginal tax rates are a justification for a high average level of taxation. The Full Employment Act of 1946 insitutionalized government deficits as a means of meeting a political objective. As a result, opportunities for rent-seeking through budgetary reallocations rose in the United States. In the first two decades of the 20th century, waste at all levels of government represented about 10 percent of incremental national output. Today, waste is three times that amount.
The transparency and diffusion of taxes are highest at the federal level and least at the local level. Rent-seeking through budgetary reallocation has followed the public purse. One explanation for the observed centralization of government in the 20th century may be that opportunities to concentrate benefits and diffuse taxes are highest at the federal level.
Finally, the withdrawal of resources from the productive economy to pursue rent-seeking in government budgets lowers the rate of real economic growth. I find that rent-seeking through budget reallocations has had a significant and large negative effect on the growth rate.
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Scully, G.W. Rent-seeking in U.S. government budgets, 1900–88. Public Choice 70, 99–106 (1991). https://doi.org/10.1007/BF00239349
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DOI: https://doi.org/10.1007/BF00239349