Essays on the determinants of the level and the structure of government expenditures and taxation

Date of Completion

January 2002

Keywords

Economics, General

Degree

Ph.D.

Abstract

This dissertation is about the factors that limit the rate of government growth with an emphasis on empirical demonstrations of effectiveness of these factors using traditional multivariate Ordinary Least Squares (OLS) estimators with panel corrected standard errors procedure and data from 21 OECD countries for the period of 1960–1997. The investigation focuses on political competition, simple and transparent tax structures, and international fiscal competition as three major factors on government growth. The first paper investigates the effect of political competition which is defined as the level of control held by individual political parties as captured by the measures of effective number of parties, number of parliamentary parties etc. In the existence of competition, neo-classical theories predict a relatively lower level of public sector growth, while public choice theories suggest excessive level of public sector growth. The empirical results show that political competition does not cause faster public sector growth but it does constraint it. The results also show that competition does constrain government growth even after controlling for ideology and for a change in the ruling party or coalition. ^ The second paper examines the effect of broad based consumption taxes especially, value added taxes on government growth. The results suggest that value added tax (VAT), a broad-based consumption tax, does not contribute to government growth. In fact, implementation of VAT could account for the current slowdowns in the rate of government growth for the countries sampled herein. This is contrary to the generally accepted hypothesis that as the share of broad-based consumption taxes in total government revenue increases, the government expands at an accelerated rate due to the hidden nature of these taxes. ^ Third paper proves the hypothesis that international openness may be a substitute for more overt attempts to constrain a government's Leviathan tendencies, such as constitutional amendments. The empirical study presented herein shows that openness constrains government growth more when the governments are run by either left leaning parties or by left leaning coalitions and when electoral systems are more competitive. Unlike the existing empirical literature, which focuses on the compensation effect of openness on government growth, this study proves the constraining effect of openness drawn from the literature on local public finance. The empirical work presented within is the first to extend the concept of fiscal competition from an inter-jurisdictional to international level. ^

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