Dictatorship,Democracy,and Development September 1993 rational self-interested autocrat chooses the revenue- favorable to democracy if we assume that the incum- maximizing tax rate. bent party or president will maximize his chances of Though the amount collected at any tax rate will reelection simply by making the electorate as a whole vary with the level of public-good provision,the as well-off as possible. revenue-maximizing tax rate for the autocrat should A candidate needs only a majority to win,and he not.This optimal tax rate determines exactly how might be able to "buy"a majority by transferring encompassing the interest of the autocrat in the income from the population at large to a prospective society is;that is,it determines what share of any majority.The taxes needed for this transfer would increase in the national income he receives.He will impair incentives and reduce society's output just as then spend money on public goods up to the point an autocrat's redistribution to himself does.Would where his last dollar of expenditure on public goods this competition to buy votes generate as much generates a dollar's increase in his share of the na- distortion of incentives through taxation as a rational tional income.At this point,the gain to society will, autocracy does?That is,would a vote-buying demo- as we know,be the reciprocal of his share. cratic leader,like the rational autocrat,have an incen- Though the subjects of the autocrat are better off tive to push tax rates to the revenue-maximizing than they would be under anarchy,they must endure level? taxes or other impositions so high that,if they were No.Though both the majority and the autocrat increased further,income would fall by so much that have an encompassing interest in the society because even the autocrat,who absorbs only a portion of the they control tax collections,the majority in addition fall in income in the form of lower tax collections, earns a significant share of the market income of the would be worse off. society,and this gives it a more encompassing inter- There is no lack of historical examples in which est in the productivity of the society.The majority's autocrats for their own political and military purposes interest in its market earnings induces it to redistrib- collected as much revenue as they possibly could. ute less to itself than an autocrat redistributes to Consider the largest autocratic jurisdictions in West- himself.This is evident from considering an option ern history.The Bourbon kings of France were (es- that a democratic majority would have if it were at the pecially on the eve of the French Revolution)collect- revenue-maximizing tax rate.At the revenue-maxi- ing all they could in taxes.The Hapsburg kings of mizing tax rate,a minuscule change in the tax rates Spain did the same.The Roman Empire ultimately will not alter tax collections.A minuscule increase in pushed its tax rates at least to the revenue-maximiz- the tax rate will reduce the national income by ing level. enough so that even though a larger percentage of income is taken in taxes,the amount collected re- mains unchanged,and a tiny reduction in the tax rate will increase the national income so much that even THE REACH OF DICTATORSHIPS AND though a smaller percentage is taken in taxes,receipts DEMOCRACIES COMPARED are unchanged.This is the optimal tax rate for the autocrat because changes in the national income How would government by a rational self-interested affect his income only by changing tax collections. autocrat compare with a democracy?Democracies But a majority at the revenue-maximizing tax rate is vary so much that no one conclusion can cover all bound to increase its income from a reduction in tax cases.Nonetheless,many practical insights can be rates:when the national income goes up,it not only obtained by thinking first about one of the simplest like the autocrat,collects taxes on a larger national democratic situations.This is a situation in which income but also earns more income in the market.So there are two candidates for a presidency or two the optimal tax rate for it is bound to be lower than well-disciplined parties seeking to form the govern- the autocrat's.The easiest arithmetic example comes ment.This simplifying assumption will be favorable from supposing that the revenue-maximizing tax rate to democratic performance,for it gives the democracy is one-third and that the majority earns one-third of an "encompassing"interest rather like the one that the national income in the marketplace.The rational motivates the stationary bandit to provide some pub- autocrat will then find that the last dollar in taxes that lic goods.I shall make the opposite assumption later. he collects reduces the national income by three But throughout,I shall avoid giving democracy an dollars.One-third of this loss is his loss,so he just unfair advantage by assuming better motivation.I breaks even on this last dollar of tax collection and is shall impartially assume that the democratic political at his revenue-maximizing rate.But if a majority leaders are just as self-interested as the stationary mistakenly chose this same tax rate,it would be bandit and will use any expedient to obtain majority hurting itself,for it would lose two dollars(the same support. dollar lost by the autocrat plus one dollar of market Observation of two-party democracies tells us that income)from the last dollar it collected in taxes.Thus incumbents like to run on a "you-never-had-it-so- a majority would maximize its total income with a good"record.An incumbent obviously would not lower tax rate and a smaller redistribution to itself leave himself with such a record if,like the self- than would be chosen by an autocrat. interested autocrat,he took for himself the largest More generally,it pays a ruling interest(whether possible net surplus from the society.But we are too an autocrat,a majority,or any other)to stop redis- 570 This content downloaded from 202.120.14.67 on Sun,19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/termsDictatorship, Democracy, and Development September 1993 rational self-interested autocrat chooses the revenue- maximizing tax rate. Though the amount collected at any tax rate will vary with the level of public-good provision, the revenue-maximizing tax rate for the autocrat should not. This optimal tax rate determines exactly how encompassing the interest of the autocrat in the society is; that is, it determines what share of any increase in the national income he receives. He will then spend money on public goods up to the point where his last dollar of expenditure on public goods generates a dollar's increase in his share of the na- tional income. At this point, the gain to society will, as we know, be the reciprocal of his share. Though the subjects of the autocrat are better off than they would be under anarchy, they must endure taxes or other impositions so high that, if they were increased further, income would fall by so much that even the autocrat, who absorbs only a portion of the fall in income in the form of lower tax collections, would be worse off. There is no lack of historical examples in which autocrats for their own political and military purposes collected as much revenue as they possibly could. Consider the largest autocratic jurisdictions in West- ern history. The Bourbon kings of France were (es- pecially on the eve of the French Revolution) collect- ing all they could in taxes. The Hapsburg kings of Spain did the same. The Roman Empire ultimately pushed its tax rates at least to the revenue-maximiz- ing level. THE REACH OF DICTATORSHIPS AND DEMOCRACIES COMPARED How would government by a rational self-interested autocrat compare with a democracy? Democracies vary so much that no one conclusion can cover all cases. Nonetheless, many practical insights can be obtained by thinking first about one of the simplest democratic situations. This is a situation in which there are two candidates for a presidency or two well-disciplined parties seeking to form the govern- ment. This simplifying assumption will be favorable to democratic performance, for it gives the democracy an "encompassing" interest rather like the one that motivates the stationary bandit to provide some pub- lic goods. I shall make the opposite assumption later. But throughout, I shall avoid giving democracy an unfair advantage by assuming better motivation. I shall impartially assume that the democratic political leaders are just as self-interested as the stationary bandit and will use any expedient to obtain majority support. Observation of two-party democracies tells us that incumbents like to run on a "you-never-had-it-so- good" record. An incumbent obviously would not leave himself with such a record if, like the self- interested autocrat, he took for himself the largest possible net surplus from the society. But we are too favorable to democracy if we assume that the incum- bent party or president will maximize his chances of reelection simply by making the electorate as a whole as well-off as possible. A candidate needs only a majority to win, and he might be able to "buy" a majority by transferring income from the population at large to a prospective majority. The taxes needed for this transfer would impair incentives and reduce society's output just as an autocrat's redistribution to himself does. Would this competition to buy votes generate as much distortion of incentives through taxation as a rational autocracy doer? That is, would a vote-buying demo- cratic leader, like the rational autocrat, have an incen- tive to push tax rates to the revenue-maximizing level? No. Though both the majority and the autocrat have an encompassing interest in the society because they control tax collections, the majority in addition earns a significant share of the market income of the society, and this gives it a more encompassing inter- est in the productivity of the society. The majority's interest in its market earnings induces it to redistrib- ute less to itself than an autocrat redistributes to himself. This is evident from considering an option that a democratic majority would have if it were at the revenue-maximizing tax rate. At the revenue-maxi- mizing tax rate, a minuscule change in the tax rates will not alter tax collections. A minuscule increase in the tax rate will reduce the national income by enough so that even though a larger percentage of income is taken in taxes, the amount collected re- mains unchanged, and a tiny reduction in the tax rate will increase the national income so much that even though a smaller percentage is taken in taxes, receipts are unchanged. This is the optimal tax rate for the autocrat because changes in the national income affect his income only by changing tax collections. But a majority at the revenue-maximizing tax rate is bound to increase its income from a reduction in tax rates: when the national income goes up, it not only, like the autocrat, collects taxes on a larger national income but also earns more income in the market. So the optimal tax rate for it is bound to be lower than the autocrat's. The easiest arithmetic example comes from supposing that the revenue-maximizing tax rate is one-third and that the majority earns one-third of the national income in the marketplace. The rational autocrat will then find that the last dollar in taxes that he collects reduces the national income by three dollars. One-third of this loss is his loss, so he just breaks even on this last dollar of tax collection and is at his revenue-maximizing rate. But if a majority mistakenly chose this same tax rate, it would be hurting itself, for it would lose two dollars (the same dollar lost by the autocrat plus one dollar of market income) from the last dollar it collected in taxes. Thus a majority would maximize its total income with a lower tax rate and a smaller redistribution to itself than would be chosen by an autocrat.9 More generally, it pays a ruling interest (whether an autocrat, a majority, or any other) to stop redis- 570 This content downloaded from 202.120.14.67 on Sun, 19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/terms