Interest group demand for taxation

Abstract

Researchers have typically ignored the determinants of the tax structure of the public sector. Political scientists have concentrated their analyses on the expenditure side of the public ledgers while economists have avoided the issue by assuming that taxes are exogenously determined. In this paper we have shown that a behavioral model of political interest groups can be employed to gain insights into the political selection of taxes. The theory provides a general complement to the well-documented analysis of special interest demand for public expenditures. Our analysis raises several important policy questions. First, is the influence of interest groups on the determination of tax systems desirable from a public policy perspective? For example, special interest groups dominated by high and middle income individuals may prefer regressive tax systems which reduce their own tax burden. Certainly the impact of interest groups on the well-known regressivity of state and local tax systems is an area worthy of additional investigation. Second, does the influence of interest groups lead to tax systems that unduly hamper economic efficiency and retard economic growth? For example, governments with economies dominated by a single industry may forsake diversity and economic development by selecting a tax system favorable to the major industry. Interest group demand for taxes may be a factor in explaining long run regional cycles such as the rise and fall of heavy manufacturing states such as the upper midwest. This research has established that a link exists between special interest group demand for taxation and the structure of local tax systems. However, the extent to which these groups influence tax systems and the exact nature of this influence requires further research. Additional research may also provide insights into the control (e.g., constitutional or legislative) of interest group influence on taxes should it be determined that such control is necessary.