Interest group size dynamics and policymaking

We present a dynamic model of endogenous interest group sizes and policymaking. The model integrates ‘top-down' (policy) and `bottom-up' (individual and social-structural) influences on the development of interest groups. Comparative statics results show that the standard assumption of fixed-sized interest groups can be misleading. Furthermore, dynamic analysis of the model demonstrates that reliance on equilibrium results can also be misleading since equilibria may be unstable. Complicated dynamics may then emerge naturally, leading to erratic time patterns for policy and interest group sizes. Our model can endogenously generate the types of spurts and declines in organizational density reported in empirical studies.     

Interest group activity and long-run stock market performance

This paper provides evidence that interest group activity is negatively related to aggregate stock market performance. In particular, the findings imply that a one percent increase in the number of interest groups in a country is associated with a reduction in average annual stock market returns of roughly 2–5%, and a reduction in the volatility of annual stock returns of roughly 6–14%. In addition, the findings indicate that many of the same fundamentals that drive economic growth also explain stock market performance.     

Testing for causality between government spending and taxation

In the past few years the public sector deficit in Greece has reached alarmingly high levels. In view of the various hypotheses about the relation between government spending and revenues, we test for causality between these two determinants of public deficit.     

Budget institutions and taxation

While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.     

Worldwide experience in sales taxation: Lessons for North America

Worldwide fiscal experience over the past twenty-five years indicates steady expansion in the political and academic constituency for expenditure taxation, including indirect taxes on consumption. Retail levies have emerged as the preferred method of indirect taxation of consumption, as older, pre-retail sales taxes have proven unsuited to modern economic structures. Increasingly, reform of sales taxation has involved a shift to one particular form of tax, the European Community type of value-added tax (VAT). This consumption tax option is again a topic of policy debate in North America, particularly in Canada where a VAT was under active consideration in 1985.This paper sifts through worldwide experience with broad-based sales taxes to identify lessons for tax policy in North America both in the short and longer-run. It indicates that the reputation of such taxes as regressive instruments may have been much exaggerated, and that in any case methods are available, particularly in Canada, for resolving equity issues in sales taxation. The VAT is shown to have marginal economic and administrative advantages over single-stage federal retail taxes in both Canada and the US. However, these advantages are not nearly so significant as in European countries where the VAT was adopted there. Further, sensible debate over the merits and limitations of the VAT in North America will call for much closer scrutiny of the problems unique to this form of tax. Finally, three political issues that were not significant in Europe will likely have an important bearing on any future choices of sales tax instruments, both in the U.S. and in Canada.     

The economics of AIDS-related health insurance regulations: Interest group influence and ideology

The projected growth in the U.S. in the number of persons with AIDS has created concern about sources of financing the costs of health care services for persons with AIDS. Private health insurers have modified or considered modifying underwriting practices in response to the AIDS epidemic, but several state governments have developed significant regulatory constraints on AIDS-related underwriting practices. We model the state government's decision to impose AIDS-related regulatory constraints (HIV testing restrictions, restrictions on the use of information about sexual orientation, and mandated AIDS coverage). We find that HIV-testing restrictions tend to be more likely in states with relatively high AIDS prevalence rates and insurance industries that are relatively weak politically. States with prevailing attitudes favorable to persons with AIDS (i.e., relatively liberal states) are more likely than other states to impose HIV-testing restrictions. Measures of prevailing attitudes (ideology) appear to be the primary determinants of regulations prohibiting questions about sexual orientation, but economic interests are the primary determinants of mandated AIDS coverage.The authors would like to acknowledge the helpful comments and suggestions of Ned Becker, Janet Bronstein, David Colby, Patrick Donnelly, Roger Faith, Robert Hughes, Robert McGuire, Delfi Mondragón, Mike Morrisey, Jack Nelson and an anonymous reviewer, with the usual disclaimer.     

Efficient bilateral taxation of externalities

We consider the quadratic voting mechanism (Lalley and Weyl in Quadratic voting. Working paper, University of Chicago, 2015; Weyl in The robustness of quadratic voting. Working paper, University of Chicago, 2015) and focus on the incentives it provides individuals deciding what proposals or candidates to put up for a vote. The incentive compatibility of quadratic voting rests upon the assumption that individuals value the money used to buy votes, while the budget balance/efficiency of the mechanism requires that the money spent by one voter by redistributed among the other voters. From these assumptions, we show that it follows that strategic proposers will have an incentive to offer proposals with greater uncertainty about individual values. Similarly, we show that, in an electoral setting, quadratic voting provides an incentive to propose candidates with polarized, non-convergent platforms.     

Progressive taxation and tax morale

Due to strong evidence indicating that tax morale affects actual tax-paying behavior, finding the determinants of tax morale could help both to understand and to fight tax evasion. In this paper we analyze the effect of progressive taxation on individual tax morale using a cross-country approach—a research question that has not been investigated in the existing literature. Our theoretical analysis leads to two testable predictions. First, an individual’s tax morale is higher, the more progressive the tax schedule is. Second, the positive impact of tax progressivity on tax morale declines with income. In our empirical analysis we make use of a unique dataset of tax progressivity measures, namely the World Tax Indicators, and follow most of the tax morale literature by employing the World Values Survey to measure individual tax morale. Controlling for a wide range of potential confounders, we are able to confirm both hypotheses in our empirical analysis.     

State income taxation with mobile labor

The ability of state and local governments to use tax and other fiscal policies to redistribute income may be limited when labor is mobile. An analysis of the allocative and distributional effects of a state income tax shows that, by driving out taxed households, the burden of the tax may be shifted to immobile households and other owners of immobile factors of production and may impose an excess burden on them. The NBER TAXSIM model is used to calculate state income tax burdens for representative high-income households in 1986–1988. Further calculations based on assumed demand elasticities for labor indicate that if high-income households are mobile, the marginal excess burden of income taxes imposed on them may be of substantial size in certain states, especially among the highest income groups.     

Patriotism, taxation and international mobility

Patriotic citizens intrinsically prefer living in their native country compared to living in the Diaspora. In this paper, we analyze the consequences of such a “patriotic lock-in” in a world with international migration and redistributive taxation. One implication is that countries with more patriotic populations are associated with higher redistributive taxes. We then combine ISSP survey data with OECD taxation data and provide empirical evidence supporting this hypothesis. Our results provide a word of caution: the Treasury’s inherent interest in patriotic taxpayers may strengthen the political push for patriotism in an age of globalization and increased mobility.     

Toward Interest Inarticulation: A Major Consequence of Corporatism for Interest Organizations

The main issue discussed is the difficulties in collective action. Three logics of collective action are identified and discussed in terms of their implications for solidarity within interest organizations and for organizational action. Both solidarity and organizational action are important for successful policymaking. Policies can be decided without the support of the members, but their implementation may thus prove difficult. The theoretical issue of interest articulation by interest organizations is the important one here. The article concludes that encompassing organizations will most likely have difficulty in articulating a definite organizational policy. It is maintained that corporatism and public responsibility-taking can severely hamper the articulation of organized special interests. They lead to interest inarticulation. This may lead to legitimacy problems for the organization and be one explanation for the recent decline in certain established interest organizations in Sweden and recent discussions on the future of corporatism.     

The public demand for smoking bans

Smoking bans are gaining widespread support in the United States and other countries. While supporters argue that bans are necessary to resolve market failures associated with negative externalities, the Coase Theorem predicts that, under various conditions, private markets internalize negative externalities. We examine the smoking issue within the framework of the Coase Theorem and hypothesize that smoking bans misallocate air space resources shared by smokers and nonsmokers. Because smoking bans shift ownership of scarce resources, they are also hypothesized to transfer income from one party (smokers) to another party (nonsmokers). Supporting evidence for these hypotheses is provided by an examination of a comprehensive smoking ban imposed in San Luis Obispo, CA.     

The demand for local government goods

Abstract. This paper analyses the spending preferences of local government elected politicians. It is argued that the median voter model is inappropriate in multi-party systems that provide multiple government services, and that the preferences of the representatives are consequential to local resource allocation. We develop a micromodel in which service demand is conditioned by exogenous public revenue, prices, and demographic factors. We hypothesise that politicians demands are affected by party affiliation, public sector occupation and committee assignment. The estimates of the micro demand functions are based on data pertaining to Norwegian local governments. It is found that the estimated income elasticities correspond approximately with elasticities of output studies. Party affiliation has an impact on demand patterns, while government occupation and committee appointment are major determinants of politicians desired allocation of public services. Further analyses reveal that the numerical strength of parties impacts weakly on the actual service allocation, whereas the representation of government employees has occasional effect. The budgetary allocations are imperfect expressions of the elected council's underlying preferences.     

Optimal taxation and economic growth: a comment

Scully (Public Choice 115: 299–312, 2003) claims that for the United States in 1960–1990, the growth-maximizing size of the state was about 19% of GDP. However if an error in the model specification is corrected and if 2001 vintage data is used (instead of 1996 vintage data), estimates of the growth-maximizing size of the state range between 9% and 29% of GDP. Further, the method spuriously identifies a ‘growth maximizing tax rate’ even if no relationship exists between growth and the size of the state. The model cannot address reliably the question it attempts to answer.