Analyzing the Interdependence of Regulation and Taxation

Abstract

This article draws attention to the interdependence of regulation and taxation. The authors analyze the nature of policy equilibrium, as well as the implications of historically important political and economic shocks, for the joint use of the two policy instruments in a framework that embodies relationships common in the literature. Regulation is represented by barriers to entry created by the government for favored industries. Among the results are the following: the introduction of new methods of communication in politics, such as television advertising, leads to increased taxation of the average voter, lower business tax rates, greater entry barriers in private markets, and greater resource use for campaign advertising, with the marginal cost of the new medium and the elasticity of supply in regulated industries playing crucial roles. Budgetary government size declines. The two additional shocks analyzed, namely, growth in the labor force participation of women and increased offshore production also have substantial consequences for tax rates as well as regulation. The article concludes with a consideration of the efficiency of policy equilibrium and the analytical problems that arise in evaluating efficiency in such a context.