Voting over Taxes and Expenditure: The Role of Home Production

This paper investigates, first, how allowance for subsistence activities, or home production, affects the standard results in models involving the majority choice of the tax rate in a flat tax—basic income scheme. The paper extends the analysis of home production to choices regarding the composition of government expenditure, in situations where there is a tax-financed pure public good in addition to a transfer payment, conditional on a given tax rate. The effect of home production is to reduce the transfer payment in each model, but the effect is small.

The Optimal Composition of Government Expenditure

This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.

Modelling the Composition of Government Expenditure in Democracies

This paper considers whether the ratio of transfer payments to expenditure on public goods in democracies can be explained as the outcome of majority voting. A simple model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The equilibrium ratio of transfers to public good expenditure per person is expressed as a quadratic function both of the ratio of the median to the mean wage, and of the tax rate. Data for 29 democratic countries are used to estimate a cross-sectional regression. The empirical results confirm that reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.

The Composition of Government Expenditure with Alternative Choice Mechanisms

This paper investigates the choice of the composition of government expenditure using both positive and normative approaches. The former involves aggregation over selfish voters (simple majority voting and stochastic voting are examined), while the latter involves the choice by a single disinterested individual (considered to maximise a social welfare function). The approach allows direct comparisons of the choice mechanisms. The structures examined include a transfer payment combined with a pure public good, and a transfer payment with tax-financed education. Explicit solutions are obtained for the choice of expenditure components, and these are shown to depend on the proportional difference between the arithmetic mean and another measure of location of incomes, where the latter depends on the choice mechanism. In each case the expenditure composition depends on an inequality measure defined in terms of the proportional difference between a measure of location of the income distribution and the arithmetic mean, where the location measure depends on the decision mechanism

The Composition of Government Expenditure in an Overlapping Generations Model

This paper examines the choice of government expenditure on public goods and transfer payments (in the form of pension) in an overlapping generations model, in which individuals live for two ‘periods’ and expenditure is financed on a pay-as-you-go (PAYG) basis. The condition required for majority support of the social contract involved in the PAYG scheme is established and shown to be independent of tax rates and expenditure levels. The choice of expenditure composition can thus be made conditional on acceptance of the social contract. Two decision mechanisms regarding the choice of government expenditure are considered. The first is positive and involves majority voting and the second is normative and involves maximizing a social welfare function. In each case the ratio of the transfer payment to public goods expenditure depends, among other things, on the ratio of median to mean income. A reduction in the skewness of the income distribution is associated with a reduction in this ratio, at a decreasing rate.Overlapping Generations Equilibrium Growth Median Voter Optimal Expenditure Public Goods Pensions

Does home production drive structural transformation?

Using new home production data for the United States, we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, which started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would have been lower by 7.5 percent in 2010

Does Home Production Drive Structural Transformation? *

Abstract Using new home production data for the U.S., we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report three main findings. First, the data support a specification with different income elasticities of market and home services. Second, non-homotheticity can alone account for the decline in the home services share, while nonhomotheticity and price effects together are responsible for the rise of market services. Third, the slowdown in home labor productivity, started in the late 70s, is a key determinant of the late acceleration of the market services sector. We use the estimated model to run a counter-factual experiment and find that, by keeping the growth rate of home labor productivity as it was before 1978, the model displays the share of market services in consumption expenditure lowered by 6.9% in 2010

Modelling the composition of government expenditure in democracies

This paper considers majority voting over the ratio of transfer payments to per capita expenditure on public goods. A model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. Labour supply is endogenous. The equilibrium ratio of transfers to public good expenditure is a function of the ratio of median to mean wages and the tax rate. Cross-sectional regressions confirmed that reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Increases in the tax rate initially increase the importance of transfer payments but eventually tax rate increases lead to lower transfers.Median voter Public goods Transfer payment

The Composition of Government Expenditure with Alternative Choice Mechanisms

This paper investigates the choice of the composition of government expenditure using both positive and normative approaches. The former involves aggregation over selfish voters (simple majority voting and stochastic voting are examined), while the latter involves the choice by a single disinterested individual (considered to maximise a social welfare function). The approach allows direct comparisons of the choice mechanisms. The structures examined include a transfer payment combined with a pure public good, and a transfer payment with tax-financed education. Explicit solutions are obtained for the choice of expenditure components, and these are shown to depend on the proportional difference between the arithmetic mean and another measure of location of incomes, where the latter depends on the choice mechanism. In each case the expenditure composition depends on an inequality measure defined in terms of the proportional difference between a measure of location of the income distribution and the arithmetic mean, where the location measure depends on the decision mechanism