Government Spending and Taxation in Democracies and Autocracies KJELL HAUSKEN, CHRISTIAN W. MARTIN THOMAS PLU ¨ MPER 1 thomas.pluemper@uni-konstanz.de Department of Politics and Management, University of Konstanz, P.O. Box D 86, D-78457 Konstanz, Germany Abstract. The paper develops a theoretical rationale for a non-linear relationship between the level of democracy and government spending. A model is presented showing why and how political participation influences the spending behavior of opportunistic governments that can choose an optimal combination of rents and public goods to attract political support. If the level of democracy remains low, governments rationally prefer rents as an instrument to assure political support. With increasing democratic partici- pation, however, rents become an increasingly expensive (per unit of political support) instrument while the provision of public goods becomes more and more efficient in ensuring the incumbent government’s survival in power. As a consequence, an increase in democracy, which drives a country from a pure autocracy to a semi-participatory system, tends to reduce government spending, while an increase in political participation from a semi-participatory country to a full democracy tends to raise the size of the public sector. JEL classification: H2, H41, D72, E62. Key words: government spending, taxation, democracy, autocracy, constitutional political economy 1. Introduction The political economy of government spending typically deals with the demand side of budget policies. Governments craft public spending as a reaction to societal requests. Historically, the first argument in this vein was proposed by Wagner (1883, 1890) who views government spending as a function of a country’s per capita income. With increasing levels of wealth, the population of a country rationally requests a higher share of public spending. Baumol (1967) provides a theoretical foundation for this relationship: Because the production of public goods is on average more labor intensive and productivity gains disproportionally advantage capital intensive sectors, the relative price of public services increases over time. Over the last two decades, the rapid increase in international economic openness directed attention to a second demand side argument of government spending. Rodrik (1996) reanimated Cameron’s (1978) pioneering work that positively related government spending to foreign economic openness. Since foreign economic liberalization redistributes income, governments have to tax the winners of globalization in order to compensate the losers. Rodrik argues that increasing international competition without compensation for the losers would accentuate existing social conflicts. Constitutional Political Economy, 15, 239–259, 2004. Ó 2004 Kluwer Academic Publishers. Printed in The Netherlands.