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Meltzer and Richards: A rational theory of the size of government

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Meltzer and Richards. 1981. A rational theory of the size of government. Journal of Political Economy 89 (5): 914-927.

Although the model is more complex than this, here's the basic idea:

  1. People vary in how productive they are. Because productivity has a constant effect on your wage, those who cannot earn a higher wage than welfare would provide will choose not to work.
  2. Income is not distributed evenly. Since it is skewed right, the mean income will exceed the median income.
  3. The relevant variables are the mean population income and the decisive person's (e.g. median voter's, or dictator's) income.
  4. Tax rates = distribution rates. All taxes go toward redistribution.
  5. Taxes are flat.
  6. Governments supply no public goods. In fact, they do nothing more than redistribute.
  7. If you get taxed more, you work less.

IN SUM: See Fig. 1, page 922

X = the difference between the decision maker's income and the income per capita. So the franchise, the median voter's income, and changes in relative productivity matter.

(a) The authors don't talk much about dictatorship, but if they did, it would probably sound a lot like the extractive "stationary bandit" that sets tax rates just high enough to maximize receipts without decreasing total economic output too much.

(b) In a democracy, the decision maker is the median voter.

(c) If the median voter does not work (is on welfare), he will set tax rates at exactly the point that a stationary bandit would (see above).

(d) If the median voter earns less than the mean income, he will set tax rates at the point that maximizes his personal income (the combination of his reduced wages (since he'll work less when there are higher taxes) and his increased welfare payments.

(e) If the median voter earns exactly the mean income (or more), he will set tax rates at zero. Why can't reverse redistribution (extraction) occur? Because if there are more rich people than poor people, they can do better by working harder than extracting.

Y = the "size of the government," but not really. Y is only the amount of redistribution.

CRITIQUE:

  • When you bring additional issue dimensions (and public goods provision) into the story, do things change? Well, most of the other things that government does can be seen as redistribution; having taxes (not tolls) pay for highways is redistribution. Moreover, other issue dimensions can be exchanged for money, so having a model of taxes and redistribution can account for a lot. Also, the conclusion mentions that there can be alternative forms of taxation (e.g. different tax bases). For example, a social security recipient with large investment income might favor taxing the labor base but not the capital base.
  • Is it reasonable to assume that all citizens (the median voter in particular) are fully informed about the ramifications of their decision? What would Olson say? The wealthiest citizens have the most to lose from increased taxes--they probably have more to lose than poor citizens stand to gain from redistribution. Thus, they have an incentive to lobby against increased taxes (if they can overcome collective action problems). The median voter, meanwhile, has very little incentive to learn, since his decision affects him less than anybody else (since he's in the middle of the distribution). At the same time, all anybody needs to know is whether he is more/less productive than average. If he's less productive than average, he should want redistribution.