A Rational Theory of the Size of Government

TLDR

In a general equilibrium labor model, government size—defined as the share of income redistributed—is determined by majority rule. Voters anticipate how taxes affect others’ labor‑leisure decisions and incorporate this into their votes, so the redistributed income share depends on the voting rule and the productivity distribution. Under majority rule, the equilibrium tax share balances the budget and reflects voters’ choices; the model predicts that expanding the franchise to shift the decisive voter’s position and changes in relative productivity raise government size, and that a rise in mean income relative to the decisive voter’s income enlarges the tax share.

Abstract

In a general equilibrium model of a labor economy, the size of government, measured by the share of income redistributed, is determined by majority rule. Voters rationally anticipate the disincentive effects of taxation on the labor-leisure choices of their fellow citizens and take the effect into account when voting. The share of earned income redistributed depends on the voting rule and on the distribution of productivity in the economy. Under majority rule, the equilibrium tax share balances the budget and pays for the voters' choices. The principal reasons for increased size of government implied by the model are extensions of the franchise that change the position of the decisive voter in the income distribution and changes in relative productivity. An increase in mean income relative to the income of the decisive voter increases the size of government.