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Laffer Paradox, Leviathan, and Political Contest

By Toshihiro Ihori


Although Leviathan-type governments would impose taxes at the level where the tax revenue is maximized, competition among governments could serve as a proper substitute for constitutional constraints on the power of politicians. It is important to consider the political contest between rent-seeking politicians and the general people. We show that with the political bargaining, the rent-seeking government may intend to set the tax rate higher than the revenue-maximizing rate. With the selection effort where the government behaves as a benevolent agent to some extent, the tax rate set by the government could again be higher than the revenue-maximizing rate. Overall, taming Leviathans by political constraints may not be as effective as that via competition among governments

Year: 2009
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