Modelling the composition of government expenditure in democracies

Abstract

This paper considers whether the ratio of transfer payments to expenditure on public goods in democracies can be explained as the outcome of majority voting. A simple model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The equilibrium ratio of transfers to public good expenditure per person is expressed as a quadratic function both of the ratio of the median to the mean wage, and of the tax rate. Data for 29 democratic countries are used to estimate a cross-sectional regression. The empirical results confirm that 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. * We are grateful to Shuyun May Li for comments on an earlier version of this paper.

The composition of government expenditure with alternative choicemechanisms

“…7. This result is consistent with Creedy and Moslehi (2009), which concentrates on transfer payment and public goods for a given tax with endogenous labour supply. In addition, see Meltzer and Richard (1981) and Romer (1975), who examined majority voting over the tax rate, with an unconditional transfer payment.…”

“…13. This is confirmed by Creedy and Moslehi (2009) in a cross-sectional study of 24 democratic countries. 14.…”

“…However, Bearse, Glomm, and Janeba (2001) examined majority voting over a transfer payment and public education, conditional on the tax rate, in a static framework. Creedy and Moslehi (2009) examined majority voting over government expenditure on transfer payments as well as public goods, with endogenous incomes, again within a static framework.…”

“…The income tax rate is assumed, as in Bearse et al (2001) and Creedy and Moslehi (2009), to be exogenously fixed and thus determined by a separate process. It may be thought of as determined by some conventional view regarding 'taxable capacity', or other constraints are imposed on governments regarding the rate.…”

Four critiques of the redistribution hypothesis: An assessment

“…In addition to the papers that do the usual cross-country testing of the median voter hypothesis and often find a rather weak support for it (Dalgaard, Hansen and Larsen 2005, Kenworthy and McCall 2008, Lind 2005, Moene and Wallerstein 2006, Nel 2007, Creedy and Moslehi 2009), a number of other papers redefine, perhaps precisely because of the weak empirical support for the straightforward application of the hypothesis, either the "identity" of the median voter or the domain of the voters. Dhami and el-Nowaihi (2007) redefine the voter so that he or she is concerned with "fairness" of the distribution and not only with individual well-being.…”