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A Distributional Theory of Government Growth

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Author Info

  • Holger Strulik

    (Institute of Economics, University of Copenhagen)

Abstract

This paper 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 paper 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.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 04-26.

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Length: 16 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:kud:kuiedp:0426

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Keywords: redistribution; government growth; Markov-perfect equilibrium;

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References

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  1. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1997. "Politico-economic equilibrium and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 243-272, January.
  2. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  3. Holger Strulik, 2002. "Fiscal Policy Reforms in a Global Economy," International Tax and Public Finance, Springer, vol. 9(1), pages 73-91, January.
  4. Kemp, Murray C & Long, Ngo Van & Shimomura, Koji, 1993. "Cyclical and Noncyclical Redistributive Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 415-29, May.
  5. Hans-Werner Sinn, 2000. "Germany's Economic Unification. An Assessment after Ten Years," CESifo Working Paper Series 247, CESifo Group Munich.
  6. Li, Hongyi & Squire, Lyn & Zou, Heng-fu, 1998. "Explaining International and Intertemporal Variations in Income Inequality," Economic Journal, Royal Economic Society, vol. 108(446), pages 26-43, January.
  7. Grossmann, Volker, 2003. "Income inequality, voting over the size of public consumption, and growth," European Journal of Political Economy, Elsevier, vol. 19(2), pages 265-287, June.
  8. Bertola, Giuseppe, 1991. "Factor Shares and Savings In Endogenous Growth," CEPR Discussion Papers 576, C.E.P.R. Discussion Papers.
  9. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  10. John Hassler & José V. Rodríguez Mora & Kjetil Storesletten & Fabrizio Zilibotti, 2001. "The survival of the welfare state," Economics Working Papers 603, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
  12. Husted, Thomas A & Kenny, Lawrence W, 1997. "The Effect of the Expansion of the Voting Franchise on the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 54-82, February.
  13. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  14. Kevin J. Lansing, 1998. "Optimal redistributive capital taxation in a neoclassical growth model," Working Papers in Applied Economic Theory 99-01, Federal Reserve Bank of San Francisco.
  15. Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
  16. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  17. Roland Benabou, 1997. "Inequality and Growth," NBER Working Papers 5658, National Bureau of Economic Research, Inc.
  18. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  19. Sala-I-Martin, X. & Barro, R.J., 1991. "Public Finance in Models of Economic Growth," Papers 640, Yale - Economic Growth Center.
  20. Brunner, Martin & Strulik, Holger, 2002. "Solution of perfect foresight saddlepoint problems: a simple method and applications," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 737-753, May.
  21. repec:chb:bcchwp:03 is not listed on IDEAS
  22. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  23. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
  24. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
  25. Branko Milanovic, 2003. "The median voter hypothesis, income inequality and income," HEW 0305001, EconWPA.
  26. Paul, Gilles Saint & Verdier, Thierry, 1996. "Inequality, redistribution and growth: A challenge to the conventional political economy approach," European Economic Review, Elsevier, vol. 40(3-5), pages 719-728, April.
  27. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  28. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
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Citations

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Cited by:
  1. Andreas Georgiadis & Alan Manning, 2012. "Spend it like Beckham? Inequality and redistribution in the UK, 1983–2004," Public Choice, Springer, vol. 151(3), pages 537-563, June.
  2. Holger Stichnoth, 2012. "Does immigration weaken natives’ support for the unemployed? Evidence from Germany," Public Choice, Springer, vol. 151(3), pages 631-654, June.
  3. Jorge Martínez-Vázquez & Violeta Vulovic & Blanca Moreno Dodson, 2012. "The Impact of Tax and Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries," Hacienda Pública Española, IEF, vol. 200(1), pages 95-130, March.
  4. Christian Bredemeier, 2014. "Imperfect information and the Meltzer-Richard hypothesis," Public Choice, Springer, vol. 159(3), pages 561-576, June.

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