The Growth of Government: Sources and Limits

Abstract:     
Theories of the size of government focus on either the demand for government or the supply of tax revenues. Demand side theories such as those of Peltzman, Meltzer and Richard, Husted and Kenny, and Lott and Kenny are essentially political theories. They emphasize the role of voters or interest groups in expanding government. Supply side theories such as those of Kau and Rubin, Baumol, West, and Ferris and West emphasize the ability of government to collect taxes. In this paper, we combine both demand and supply side theories. For demand, we use the Poole-Rosenthal time series data on the ideology of Congress, on the theory that all political forces must ultimately express themselves in voting which is measured by ideology. For supply, we use the Kau-Rubin measures of the ability of government to collect taxes as a function of the deadweight costs of tax collection and ability of individuals to hide revenues. We find that female labor force participation and the associated ability to tax female productivity is the most important factor associated with government, and it alone explains about 60% of the actual growth of government. The ideology of the Senate is also significant, but has a small effect. This paper may be the first to examine the influence of ideology on the time path of a policy; other research examining ideology (including ours) has been cross sectional. Further research on the role of ideology in changing policies over time is clearly warranted.

Number of Pages in PDF File: 20

Keywords: government growth, ideology, tax revenues

JEL Classification: H1, H20, H30

working papers series