Abstract
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.