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Modelling the Composition of Government Expenditure in Democracies

  • John Creedy
  • Solmaz Moslehi

This paper considers whether the ratio of transfer payments to expenditure on public goods in democracies can be explained as the outcome of majority voting. A simple model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The equilibrium ratio of transfers to public good expenditure per person is expressed as a quadratic function both of the ratio of the median to the mean wage, and of the tax rate. Data for 29 democratic countries are used to estimate a cross-sectional regression. The empirical results confirm that reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.

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File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-07/1007.pdf
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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1007.

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Length: 36 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mlb:wpaper:1007
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Web page: http://fbe.unimelb.edu.au/economics
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