Abstract
This article presents a closed form solution for time-consistent taxation and public spending in a dynamic game between government and median voter. Extending Meltzer and Richard’s static analysis of government size the article offers a theory of growth of government. At low stages of economic development the median voter, identified as a relatively poor worker, prefers to have no or only small redistributive taxation in order to foster savings. Through this channel he expects improvements of his labor productivity and wage. At higher stages of development, however, when capital is relatively abundant and prospects of further labor productivity gains through capital accumulation are smaller, the incentive to tax and redistribute income rises. Yet, in line with previous work on growth and infrastructure spending the median voter prefers a constant share of productive public spending at all times. Hence, government growth is solely driven by an expanding welfare state.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Alesina, A., & Rodrik, D. (1994). Distributive politics and economic growth. Quarterly Journal of Economics, 109, 465–449.
Barro, R. J. (1990). Government Spending in a simple model of endogenous growth. Journal of Political Economy, 98, S.103–S.125.
Barro, R. J., & Sala-i-Martin, X. (1992). Public finance in models of economic growth. Review of Economic Studies, 59, 645–661.
Benabou, R. (1996). Inequality and growth. NBER Working Paper 5658.
Benabou, R. (2000). Unequal societies: Income distribution and the social contract. American Economic Review, 90, 96–129.
Bertola, G. (1993). Factor shares and savings in endogenous growth. American Economic Review, 83, 1184–1198.
Borcherding, T. E. (1985). The causes of government expenditure growth: A survey of the U.S. evidence. Journal of Public Economics, 28, 359–382.
Borcherding, T. E., Ferris, J. S., & Garzoni, A. (2004) Growth and the real size of government since 1970. In J. Backhaus & R. E. Wagner (Eds.), The Kluwer handbook of public finance, Hingham, MA: Kluwer Academic Press.
Boix, C. (2001). Democracy, development and the public sector. American Journal of Political Science, 45, 1–17.
Brunner, M., & Strulik, H. (2002). Solution of perfect foresight saddlepoint problems: A simple method and applications. Journal of Economic Dynamics and Control, 26, 737–753.
Caselli, F., Esquivel, G., & Lefort, F. (1996). Reopening the convergence debate: A new look at cross-country growth empirics. Journal of Economic Growth, 1, 363–389.
Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54, 607–622.
Dalgaard, C.-J., Hansen, H., & Larsen, T. (2003). Income skewness, redistribution and growth: A reconciliation. EPRU Working Paper 2003-14, University of Copenhagen.
Deininger, K., & Squire, L. (1998). New ways of looking at old issues: Inequality and growth. Journal of Development Economics, 57, 259–287.
Grossmann, V. (2003). Income inequality, voting over the size of public consumption, and growth. European Journal of Political Economy, 19, 265–287.
Hassler, J., Rodriguez Mora, J. V., Storesletten, K., & Zilibotti, F. (2003). The survival of the welfare state. American Economic Review, 93, 87–112.
Husted, T. A., & Kenny, L. W. (1997). The effect of the expansion of the voting franchise on the size of government. Journal of Political Economy, 105, 54–82.
Islam, N. (1995). Growth empirics: A panel data approach, Quarterly Jounal of Economics, 110, 1127–1170.
Judd, K. L. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28, 59–83.
Kemp, M. C., Long, N. V., & Shimomura, K. (1993). Cyclical and noncyclical redistributive taxation. International Economic Review, 34, 415–429.
Krusell, P., Quadrini, V., & Ríos-Rull, J.-V. (1997) Politico-economic equilibrium and economic growth. Journal of Economic Dynamics and Control, 21, 243–272.
Krusell, P. (2002). Time-consistent redistribution. European Economic Review, 46, 755–769.
Lansing, K. J. (1999). Optimal redistributive capital taxation in a neoclassical growth model. Journal of Public Economics, 73, 423–453.
Li, H., Squire, L., & Zou, H. (1998). Explaining international and intertemporal variations in income inequality. Economic Journal, 108, 26–43.
Meltzer, A. H., & Richard, S. F. (1981). A rational theory of the size of government. Journal of Political Economy, 89, 914–997.
Meltzer, A. H., & Richard, S. F. (1983). Tests of a rational theory of the size of government. Public Choice, 41, 403–418.
Milanovic, B. (2000). The median-voter hypothesis, income inequality and income redistribution: An empirical test with the required data. European Journal of Political Economy, 16, 367–410.
Perotti, R. (1996). Growth, income distribution and democracy: What the data say. Journal of Economic Growth, 1, 149–187.
Persson, T., & Tabellini, G. (1994). Is inequality harmful for growth? American Economic Review, 84, 600–621.
Roberts, K. W. S. (1977). Voting over income tax schedules. Journal of Public Economics, 8, 329–340.
Romer, T. (1975). Individual welfare, majority voting and the properties of a linear income tax. Journal of Public Economics, 4, 163–185.
Saint-Paul, G., & Verdier, T. (1996). Inequality, redistribution and growth: A challenge to the conventional political approach. European Economic Review, 40, 719–728.
Sinn, H.-W. (2000). Germany’s economic unification: An assessment after ten years. Review of International Economics, 10, 113–128.
Strulik, H. (2002). Fiscal policy reforms in a global economy. International Tax and Public Finance, 9, 71–89.
Tanzi, V., & Schuknecht, L. (2000). Public spending in the 20th century: A global perspective. Cambridge: Cambridge University Press.
Author information
Authors and Affiliations
Corresponding author
Additional information
JEL Classifications: E6, H21, O40
Rights and permissions
About this article
Cite this article
Strulik, H. A distributional theory of government growth. Public Choice 132, 305–318 (2007). https://doi.org/10.1007/s11127-007-9153-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11127-007-9153-1