Bureaucracy, Tax System, and Economic Performance

This paper investigates the consequences for government size, growth and welfare if a selfish bureaucracy provides a congested input. Alternative exogenous tax systems are introduced and numerical analyses are carried out. The welfare optimum is only met under very specific assumptions: proportional congestion, a tax system only consisting of distortionary taxes and a bureaucracy that maximizes the budget's growth rate. Otherwise the relative size of the public sector becomes suboptimally large thus inducing welfare losses. From a welfare economic point of view bureaucratic selfishness is worse than a suboptimal taxing regime that does not (completely) internalize the congestion externalities.