A competitive model of the growth of government

Develops a general equilibrium model of the growth of government based on the attempts of various socio‐economic groups to redistribute income in their own favour. In the non‐cooperative equilibrium of our model under free political competition, every group in the economy pays taxes at rates which maximize the net contribution of each to their government′s budget. On the basis of this model, argues that the recent growth of government can be explained by the increased role of human capital as a factor of production; the rise in the population share of the elderly; and the reductions in the relative value of non‐market uses of labour caused by increased specialization and population pressure. Human capital, which has been both an important source of growth in income and the main factor behind the expansion of the middle class, seems to be a relatively easy‐to‐tax asset. This finding may resolve the puzzle of simultaneous growth of government and increase in income equality in developed countries that has challenged recent models of redistributive taxation.