In his paper Niskanen provides valuable analysis of the effects of the voting rule, the progressivity of the tax structure, and the length of the fiscal horizon in democratic governments and interesting insights of the effect of alternative regimes on policies, such as war and immigration, that affect the number of people subject to the regime. His article follows Mancur Olson’s work called “Autocracy, Democracy, and Prosperity”. This paper is focused on the set of historical conditions that led to the progression from anarchy to autocracy to democracy.
The motivation to write this paper was to understand why some autocracies were broadly popular. Models of Government The section entitled “Models of government” develops simple is HHhmodels of autocratic, democratic, and optimal governments, where each model includes two common functions relating economic conditions and tax revenues to the primary fiscal decisions relating economic conditions by each type of government. This provides a basis for comparing economic conditions resulting from each type of government.
Each of the major types of government is defined by who controls the government and by the economic and fiscal conditions that best serve their interests. Autocratic government is defined as one controlled by a specific autocrat. And the interests of this autocrat are defined in terms of the difference between the level of tax revenues and the level of total government expenditures for goods and services. Further, for the autocrat, the tax rate that best serves his interests is the revenue-maximizing tax rate.
For democratic government is less obvious who controls this government. Niskanen supposes that the effective decision-maker in a democracy with majority rule is the median voter who is assumed to be from a median-income household. The interests of the median voter are defined in terms of the sum of his income minus taxes plus transfer payments received. The voter is concerned about both his income after taxes and transfer payments received, this rate is substantially lower than the revenue maximizing tax rate that is characteristic of autocratic government.
A democratic government will spend more for government services than an autocratic government because an increase in these services over some range increases both the income after taxes and the transfer payments received by the median voter. For the model of optimal government, the effective decision-maker is assumed to be a person who has no idea about his or her future income and simultaneously, this person is assumed to be risk-neutral to future income after taxes. At this point, Niskanen states that no real government is optimal or perfect.
The primary value of defining the characteristics and outcomes of optimal government is to provide a basis for comparison with the major types of real governments. The Parameters The section “The Parameters”, presents several sets of parameters for each type of government, each estimated from recent economic and fiscal conditions in the United States. In the subsequent analysis are compared the first-year effects with the long-term effects. For the comparison is also defined a parameter that reflects the actual set of fiscal and economic conditions in the United States in 1989.
Some Suggestive Quantitative Results The models of government now provide a basis for suggestive quantitative answers to the several questions relating to the level of government spending or to the average tax rate. The differences in the fiscal decisions and economic outcomes are striking. Outcomes based on parameters, that reflect the actual set of fiscal and economic conditions, are calculated to replicate the major fiscal decisions by government in the United States in 1989.
The major results are that the autocratic government is a great benefit to the autocrat but a disaster for the general population. The autocrat would probably try to maintain the general population in effective slavery and the substitution of democratic for autocratic government generates large net benefits to the general population. The substitution of optimal government for democratic government substantially increases average net income but at some loss to the majority of the population.
Comparisons across the major types of government indicate that total output increases with each step toward an optimal government. In summary, the democratic government may be better than any relevant alternative. The major pattern of Outcomes of fiscal decisions based on their first-year effects is that the long-term effects of a myopic autocrat are slightly lower than the first-year effects. Another pattern is that democratic government leads to substantially higher total output, but also to the higher expenditures for domestic government services.
The outcomes of fiscal decisions that are based on their long-term effects are superior to those based on their first-year effects, even in the short term. Autocracy is clearly the worst form of government. Optimal government would have a slightly lower total output, government spending, and tax rate in comparison to a democratic government with a long fiscal horizon and no transfer payments. Further, Niskanen analyses the democratic government with different distribution of income, different tax payments and different transfer payments.
In this model, the best system appears to be that based on 50 percent voting rule with the progressive taxation. I admire Niskanen’s ability to reduce complex settings to simple model and to do so in a way that allows him to extract empirically meaningful and interesting implications. According to me, the most interesting finding is that output and government services are higher in a democracy than in an autocracy, but the tax rate is lower. Then, I would agree with Niskanen that this type of analysis is not complete and merits extension, especially the effects of population change should be incorporated.