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Autocratic, Democratic, and Optimal Government

Fiscal Choices and Economic Outcomes

William A. Niskanen

This book presents simple models of the major alternative types of political regimes, estimates of the parameters of these models, and quantitative estimates of the fiscal choices and economic outcomes of these regimes. William Niskanen provides valuable analysis of the effects of the voting rule, the progressivity of the tax structure, and the length of the fiscal horizon in democratic governments and interesting insights of the effects of alternative regimes on policies, such as war and immigration, that affect the number of people subject to the regime.
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Chapter 2: Models of Government

William A. Niskanen


THE COMMON ECONOMIC AND FISCAL FUNCTIONS Those who control any government face a common pair of primary fiscal decisions: Choose the level of government expenditures and the rate of taxation that best serve their interests. For each type of government, thus, the control group must have a rough understanding of the effects of these fiscal choices on the level of output and, in turn, on the level of tax revenues in the specific economy subject to that government. For each of the several major types of government, these effects are represented by the following two common functions: Yϭa(1ϩG)b(1ϪR)c, and TϭRYϭa(1ϩG)bR(1ϪR)c, (2.2) (2.1) where Y is the level of output per potential worker, G is the level of government expenditures per potential worker (excluding military expenditures, net interest payments, transfer payments, and subsidies), R is the average tax rate (expressed as a share of output), and T is the level of tax revenues per potential worker.1 For these two functions, the parameter a is the level of output per potential worker that is independent of a government’s fiscal choices, the parameter b is the “elasticity” (relative proportionate change) of output with respect to the level of (1ϩG), and the parameter c is the elasticity of output with respect to the after-tax rate. Also, unless otherwise men6 Models of Government 7 tioned, the budget of each type of government is assumed to be...

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