Rent Seeking and the Excess Burden of Taxation

33 Pages Posted: 3 May 2014

See all articles by Nava Kahana

Nava Kahana

Bar-Ilan University - Department of Economics; IZA Institute of Labor Economics

Doron Klunover

Bar-Ilan University

Abstract

The social costs of rent seeking are generally evaluated with respect to rent dissipation. A common assumption is complete rent dissipation so that the value of a contested rent is the value of social loss. When rent seekers earn taxable income, there is interdependence between the social cost of rent seeking through rent dissipation and the excess burden of taxation. Through the addition of substitution to rent seeking beyond leisure, rent seeking increases the excess burden of taxation under risk neutrality when leisure is non-inferior. We derive a condition for rent seeking to increase the excess burden of taxation under risk aversion. Our conclusion is that, when rent seekers can earn taxable income, rent seeking is more socially costly than is inferred from contest models alone, because of an increased excess burden of taxation.

Keywords: rent seeking, excess burden of taxation, welfare cost of taxation, size of government

JEL Classification: H2

Suggested Citation

Kahana, Nava and Klunover, Doron, Rent Seeking and the Excess Burden of Taxation. IZA Discussion Paper No. 8160, Available at SSRN: https://ssrn.com/abstract=2432444

Nava Kahana (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Doron Klunover

Bar-Ilan University ( email )

Ramat Gan
Ramat Gan, 52900
Israel

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