Three Essays on Tax Efficiencies, Political Incentives, and Deadweight Loss

Adam N Michel

Major Professor: Thomas Stratmann, PhD, Department of Economics

Committee Members: Richard E Wagner, Stefanie Haeffele, Jason Fichtner

Buchanan Hall (formerly Mason Hall), #D180
July 16, 2019, 10:00 AM to 12:00 PM


Traditional public finance tax theory focuses almost exclusively on minimizing the deadweight loss of a tax system. The resulting models for tax analysis rarely consider the tax system’s impact on political incentives and the various efficiencies and inefficiencies that exist in political institutions.

The first chapter explores the tension between economic efficiency and institutional efficiency through their corresponding literatures in public finance. By reviewing the two literatures, I show where the economic efficiency lens of traditional public finance can be improved by the insights of scholars who value economically inefficient tax systems characterized by a narrow tax base and institutional restrictions on expanding what is subject to tax. While these two schools of thought may never be completely integrated, traditional public finance would benefit from incorporating public choice and institutional insights into the analysis.

The second chapter presents a history of the Japanese Value Added Tax (VAT) as an important case study of how the political incentives of a tax system can ultimately change the size of government. Governments tend to grow over time, punctuated by crisis. Adding new taxes, or even considering them as a politically viable future option, can remove important constraints on the growth of the size of government.

The third chapter tests the hypothesis that harmonization of disparate sovereign tax systems can remove competitive pressures which otherwise constrain government growth. I use historical data from the U.S. states as they first implemented a uniform system of corporate income tax apportionment and then moved toward a more varied system with less coordination. Consistent with theory, I show that competition and diversity between tax systems is associated with lower tax rates and slower growth of government expenditures.