Bureaucratic Tax-Seeking: The Danish Waste Tax

Two main results in traditional tax theory states the following. First, general taxes minimize the welfare loss from changed relative prices. Second, because the total public budget tends to exceed the optimal size, a leader (here named ‘troop leader’) is needed in the budget process to prevent over-taxation. Nevertheless, differentiated taxes initiated by individual ministries generate a still larger proportion of total tax revenue, in particular under cover of taxing externalities such as environmental pollution. We suggest that this situation leads to over-taxation for two reasons. First, the absence of a strong and fully informed troop leader prevents rational coordination of collective action. Second, budget maximization leads to overwhelming fiscal pressure because bureaucracies are competing about resources just like fishermen or hunters (here named ‘bureaucratic tax-seeking’). Taxing citizens or firms is like harvesting rents from a natural resource and therefore we apply a common-pool resource model. Because bureaucracies compete about maximizing their share of tax payers‘ money, this leads to over-taxation and an irrational outcome for both bureaucrats and society. These suggestions are strongly confirmed by the case of the Danish waste tax. Thus, we recommend that bureaucratic institutions should coordinate their tax-seeking efforts to maximize budgets in the long run and that the ministries that collect green tax revenues should not be allowed to control these revenues. Such a budget maximization opportunity would kick off a new self-destructive fiscal race among competing tax-seeking bureaucracies.