Tax shares and government spending in a median voter model

Abstract

When tax shares can be included in political platforms, there will be a bias toward more government spending. This bias is the result of the fact that demand curves slope downward. Political parties can compete for votes by offering pivotal voters lower tax shares, but when they do, a lower price per unit of government will cause the quantity demanded to rise. This yields an advantage to platforms promising more government. This concept was examined within the framework of a median voter model, and Figure 1 summarizes graphically the main conclusions of the model. In an initial situation, two parties are competing in an election. D m is the demand curve of the median voter, tax shares are fixed at t for all voters, and the parties propose Q L and Q H such that the median voter is indifferent between Q L and Q H . In the Downsian model, the party platforms converge on Q M , most preferred by the median voter, and Q M is the result of a majority rule election. If the parties are constrained to keep their platforms at Q L and Q H (for ideological reasons, perhaps), but can compete for voters by adjusting tax shares of individual voters, it was shown that the party offering Q H can always win the election. Thus, there is a bias toward larger government, induced by the downward sloping demand curves of voters. An attempt to win the vote of D m , for example, moves the median voter's most preferred level of government away from Q L , toward Q H . From the initial restriction that the median voter is indifferent between Q L and Q H at tax price t, it is apparent that a lower Q L offered by one party will enable the other party to increase Q H . This bias toward large government suggests why it is difficult even for politicians who favor smaller government to put together a viable political platforms that will actually reduce government size. The model was then extended to allow parties to adjust the quantities of government in their platforms, subject to the restriction that Q L ≤ Q H . In this case, the party platforms converge on Q*, where the marginal value of government spending to the median voter is zero. This is, admittedly, an extreme case, since the majority party does not have an unlimited ability to manipulate tax shares. However, it illustrates once again the bias toward larger government, and shows that Downsian competition leads to a determinate equilibrium level of government spending in excess of Q M that would be produced when tax shares cannot be manipulated. In summary, when tax shares can be included in political platforms politicians will attempt to win votes by lowering the tax shares of pivotal voters. These lower tax shares cause the quantity of government demanded to increase, and politicians will respond by offering more government. Thus, if tax shares can be included in political platforms, there is a bias toward larger government. Copyright Martinus Nijhoff Publishers 1985