Deadweight Costs and the Size of Government

with Gary S. Becker

Abstract

We provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare and show that a tax system or spending program which is suboptimal from a Ramsey point of view can improve taxpayer welfare because the system creates additional political pressure for suppressing the growth of government. Relevant examples include the use of inflation taxes, capital taxes, excise taxes, deficit financing, and income taxes with many “loopholes.” We also demonstrate the similarity of the political responses to revenue shocks, spending shocks, changes in program efficiency. In a broad sample of countries for the years 1973-90, we show that “more efficient” tax systems - systems which rely on broad-based taxes with fairly flat rate structures - are associated with larger governments. An analysis of defense spending - especially wartime spending - oil shocks, intergovernmental grants and other flypaper effects suggests that the cause and effect is not from spending to tax structures.

The paper is circulated as:

NBER Working Paper No. 6789, November 1998.
CSES Discussion Paper Series, September 1998.