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Laffer paradox, Leviathan, and Political Contest

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  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

  • C.C. Yang

    (Institute of Economics, Academia Sinica)

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    Abstract

    This paper considers a political contest model wherein self-interested politicians seek rents from the public budget, while general voters make political efforts to protest against politicians' rent seeking directly (for example, through voting in referendums such as the passage of Proposition 13) or indirectly (for example, through donating money to organized groups such as the National Taxpayer Union). We show that the political contest may ironically lead to the Laffer paradox; that is, rent-seeking politicians may intend to set the tax rate higher than the revenue-maximizing rate. For taming Leviathans, political protests may not be as effective as competition among governments.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2010/2010cf769.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-769.

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    Length: 19pages
    Date of creation: Oct 2010
    Date of revision:
    Handle: RePEc:tky:fseres:2010cf769

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    1. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April.
    2. Michelle R. Garfinkel & Stergios Skaperdas, 2006. "Economics of Conflict: An Overview," Working Papers 050623, University of California-Irvine, Department of Economics, revised Sep 2006.
    3. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
    4. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
    5. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
    6. Long, Ngo Van & Vousden, Neil J, 1987. "Risk-Averse Rent Seeking with Shared Rents," Economic Journal, Royal Economic Society, vol. 97(388), pages 971-85, December.
    7. Wrede, Matthias, 1999. " Tragedy of the Fiscal Common?: Fiscal Stock Externalities in a Leviathan Model of Federalism," Public Choice, Springer, vol. 101(3-4), pages 177-93, December.
    8. Wenders, John T, 1987. "On Perfect Rent Dissipation," American Economic Review, American Economic Association, vol. 77(3), pages 456-59, June.
    9. Hoyt, William H., 1999. "Leviathan, local government expenditures, and capitalization," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 155-171, March.
    10. Anderson, G M & Shughart, William F, II & Tollison, R D, 1989. "Political Entry Barriers and Tax Incidence: The Political Economy of Sales and Excise Taxes," Public Finance = Finances publiques, , vol. 44(1), pages 8-18.
    11. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
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