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https://hdl.handle.net/2142/70789
Description
Title
A Model of the Growth of Government
Author(s)
Dao, Minh Quang
Issue Date
1987
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
The present study develops a general equilibrium model of taxation based on the competition of various groups to enter the dominant coalition in the economy. This competition leads to an equilibrium where the net taxes paid by each group are maximized. The model shows that the size of government is a function of the sizes of various groups in the economy, their asset holdings, and their ability to shift assets away from taxable activities. The growth of government can, then, be explained not only by the increase in assets--a formulation of Wagner's law which relates the size of government to the level of income--, but also by changes in the composition of the population and, more importantly, by the reduced opportunities for the use of productive assets, especially skilled labor, in nonmarket activities. In particular the growth of the middle class which relies heavily on the supply of human capital may have led to its increased dependence on the market to higher and more equal incomes, and to the greater power to tax of the government. The model is also capable of explaining the existence of such phenomena as progressive income taxation and sectoral tax and subsidy policies.
The model is tested using annual data for the United States and cross-section data for 19 OECD countries. This allows for international comparisons in terms of redistribution and tax shares (e.g., why redistribution tends to be larger in democracies and/or in developed economies). The model attributes the growth of government in the developed world over the last fifty years to the increase in the proportion of the retired population and to the expansion of the middle class.
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