Tax Rate and Government Expenditure

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Abstract
SUMMARY: This article is concerned with the development and empirical application of a behavioural model of government policies. A short discussion of the existing models in this field, such as reaction‐function models, voting models, and interest group models, is given. A simple model of government behaviour is presented, using the so called interest function approach. In the model a central role is allocated to the own interests of government sector workers (politicians and bureaucrats). The interests of social groups outside the government organization are taken into account by the government through factors such as mobility (probability of becoming a member of another group) and pressure through political parties or otherwise. This leads to the formulation of what is called a complex interest function for the government which is maximized to determine its behaviour. The model is applied to The Netherlands (1921‐1985). A striking outcome is that the numerical strengths of the three social groups that are actively involved in the production process, to wit government and private sector workers, and self‐employed, appear to be determinant for the overall tax rate and the relative level of government expenditure.