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Meltzer and Richards: A rational theory of the size of government

Disclaimer. Don't rely on these old notes in lieu of reading the literature, but they can jog your memory. As a grad student long ago, my peers and I collaborated to write and exchange summaries of political science research. I posted them to a wiki-style website. "Wikisum" is now dead but archived here. I cannot vouch for these notes' accuracy, nor can I say who wrote them.

Meltzer and Richards. 1981. A rational theory of the size of government. Journal of Political Economy 89 (5): 914-927.

Although the model is more complex than this, here's the basic idea:

  1. People vary in how productive they are. Because productivity has a constant effect on your wage, those who cannot earn a higher wage than welfare would provide will choose not to work.
  2. Income is not distributed evenly. Since it is skewed right, the mean income will exceed the median income.
  3. The relevant variables are the mean population income and the decisive person's (e.g. median voter's, or dictator's) income.
  4. Tax rates = distribution rates. All taxes go toward redistribution.
  5. Taxes are flat.
  6. Governments supply no public goods. In fact, they do nothing more than redistribute.
  7. If you get taxed more, you work less.

IN SUM: See Fig. 1, page 922

X = the difference between the decision maker's income and the income per capita. So the franchise, the median voter's income, and changes in relative productivity matter.

(a) The authors don't talk much about dictatorship, but if they did, it would probably sound a lot like the extractive "stationary bandit" that sets tax rates just high enough to maximize receipts without decreasing total economic output too much.

(b) In a democracy, the decision maker is the median voter.

(c) If the median voter does not work (is on welfare), he will set tax rates at exactly the point that a stationary bandit would (see above).

(d) If the median voter earns less than the mean income, he will set tax rates at the point that maximizes his personal income (the combination of his reduced wages (since he'll work less when there are higher taxes) and his increased welfare payments.

(e) If the median voter earns exactly the mean income (or more), he will set tax rates at zero. Why can't reverse redistribution (extraction) occur? Because if there are more rich people than poor people, they can do better by working harder than extracting.

Y = the "size of the government," but not really. Y is only the amount of redistribution.


Research on similar subjects


Meltzer, Allan (author)Richards, Scott (author)EconomicsElectionsElectoral RulesInstitutionsOrigins of InstitutionsVotingStructure of Interests in Society

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