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The Optimal Composition of Government Expenditure

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  • John Creedy
  • Solmaz Moslehi

Abstract

This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the mean wage, and of the tax rate. 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.

Suggested Citation

  • John Creedy & Solmaz Moslehi, 2007. "The Optimal Composition of Government Expenditure," Department of Economics - Working Papers Series 1008, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1008
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    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0004/802831/1008.pdf
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    References listed on IDEAS

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    1. Tridimas, George & Winer, Stanley L., 2005. "The political economy of government size," European Journal of Political Economy, Elsevier, vol. 21(3), pages 643-666, September.
    2. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
    3. Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," American Economic Review, American Economic Association, vol. 80(1), pages 37-49, March.
    4. 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 914-927, October.
    5. Been-Lon Chen, 2006. "Economic growth with an optimal public spending composition," Oxford Economic Papers, Oxford University Press, vol. 58(1), pages 123-136, January.
    6. Lee, Jisoon, 1992. "Optimal size and composition of government spending," Journal of the Japanese and International Economies, Elsevier, vol. 6(4), pages 423-439, December.
    7. Romano Piras, 2001. "Government Spending Composition in an Endogenous Growth Model with Congestion," Metroeconomica, Wiley Blackwell, vol. 52(1), pages 121-136, February.
    8. Rainald Borck, 2007. "Voting, Inequality And Redistribution," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 90-109, February.
    9. Creedy, John & Moslehi, Solmaz, 2009. "Modelling the composition of government expenditure in democracies," European Journal of Political Economy, Elsevier, vol. 25(1), pages 42-55, March.
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    Cited by:

    1. John Creedy & Shuyun May Li & Solmaz Moslehi, 2008. "The Composition of Government Expenditure in an Overlapping Generations Model," Department of Economics - Working Papers Series 1043, The University of Melbourne.
    2. Agustín Molina Morales & Ignacio Amate Fortes & Almudena Guarnido, 2013. "Institutions and Public Expenditure on Education in OECD Countries," Hacienda Pública Española, IEF, vol. 204(1), pages 67-84, March.

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