Costs of Collective Decisions, Choice of Tax Base, and Median Voter Equilibrium

Abstract

This note examines the relationship between public expenditure growth and tax base elasticity in the context of the median voter model. If the revenue elasticity of the tax base and the median voter's income elasticity of demand for public services are not identical, the automatic increase in public revenue resulting from an increase in voter income will not match the median voter's increase in demand for public service expenditures. If adjusting tax rates is costly, the short-run rate of growth ofpublic expenditures will be biased in the direction of the automatic growth in tax revenue rather than being tied directly to changes in the median voter's demand for public services. The welfare loss occasioned by these positive decision-making costs can be reduced by choosing that tax base for which revenue elasticity most closely corresponds to income elasticity and also by evaluating tax rates in a multiperiod context at the time they are imposed.