The Impact of Baumol's Disease on Government Size and Taxation

Abstract

This paper investigates Baumol's cost disease in the presence of distortionary taxation. A model is presented in which one sector experiences low labor productivity growth relative to the rest of the economy and draws out the implications for public spending. Specifically, if the government takes over the provision of such goods, then the public sector will continue to grow and the tax rate will be pushed to the top of the Laffer curve over time. This paper also finds that the desire for redistribution will be crowded out by the impact of unbalanced growth and Baumol's cost disease.