Controlling leviathan through tax reduction

Conclusion

Our paper seeks the strategy that allows the greatest ability to reduce public sector size within a political environment that does not want us to directly set limits on public sector size. Tax reduction, through its quid pro quo effect, offers high tangibility to taxpayers and may raise political power of groups that seek both tax reduction and greater opposition to lobbies that seek spending increases for their narrowly-defined interests. Moreover, as Manage and Marlow (1986) argues, since the political response to balanced budget rules is likely to raise taxes, this political bias of tax hikes suggests that balanced budget rules are offered as a means of changing the funding mix and not the actual budget constraint of government.

Our analysis should not be construed as a statement promoting deficit finance. Preferred policy is one that forces tax reduction, a balanced budget and price stability. However, this is ‘optimal’ only in a world without political constraints and special interests seeking public funds. Hard second-best choices, based on available analytical and empirical evidence, suggest that tax reduction controls the most important element of the budget constraint and that we should not rely solely on balanced budget rules to solve the underlying public sector growth problem.