Meltzer and Richard (1981) Flashcards
Theoretical memorisation.
What is the area of research Meltzer and Richard (1981) covers?
This paper focuses on a rational theory of the size of government and how this is determined in political economy.
Define the size of government. How is this determined?
The size of government is defined via the measure of income redistributed in the economy.
It is determined by the preferred tax rate of the Median Voter.
What are the main assumptions of the Meltzer and Richard (1981) model?
Voters are rational, not myopic, individuals who aim to maximise utility via tax rate. They act on full information and are aware of the state of the economy and the consequences of taxation on income redistribution.
Define ‘fiscal illusion’. Do voters fall victim to this in the Meltzer and Richard (1981) model?
Fiscal illusion is where the government can easily and repeatedly extract excess tax revenue from the population. This is due to myopic behaviour, especially concerning the unemployment-inflation trade off via the Phillip’s curve.
The size of the government is a function of two main factors, what are they?
The factors are the spread of enfranchisement and the initial distribution of wealth.
How does voter enfranchisement effect the size of government in the Meltzer and Richard (1981) model?
As voter enfranchisement increases, a greater proportion of the population can vote. This is typically seen via increased democratisation.
Empirically, greater enfranchisement often empowers individuals with lower incomes. This has the effect of increasing government size (via increased taxation) as the Median Voter desires more redistribution.
A standard income distribution tends to be positively skewed. What does this mean for the relation of the median and weighted mean incomes?
Weighted mean will be greater than the median. As this gap grows, the Median Voter will desire a higher tax rate.
The model puts forward the idea of the Decisive Voter, one who swings the vote one way or the other. List the two empirical reasons the position of the Decisive Voter has changed over time.
Wealth and income requirements for voting were reduced or abolished through history. This gradually broadened the voter enfranchisement thus lowering the income of the Decisive (Median) Voter.
After increased voter enfranchisement, social retirement plans improved. This increased the number of retired personnel who desired more taxation to fund their retirement yet preferred taxation on income rather than capital.
Describe how greater enfranchisement and a Majority Rule voting system leads to more redistribution of income.
With Majority Rule the Median Voter becomes the Decisive Voter in the Meltzer and Richard (1981) model. Greater enfranchisement shifts the Median Voter down the income distribution where greater levels of income distribution, financed by higher taxation, are desired.
Do the assumptions of the model hold up empirically?
The model assumes rational voters who are non-myopic and understand how taxation is necessary to finance redistribution of income. The Median Voter is also aware of how their choice impacts the incomes of others due to their decisive role.
In reality, this is a bit extreme. The average individual holds little understanding for the economy and how their choices impact others. They are also likely unaware of the hidden efforts exerted by politicians in order to capture votes and are thus susceptible to fiscal illusion.
