The Impact of Baumol's Disease on Government Size and Taxation

Abstract

This paper investigates the implications of Baumol’s cost disease for a publicly provided good in the presence of distortionary taxation. A model is presented in which the publicly provided good experiences low labor productivity growth relative to the private good. The public sector will grow monotonically with the productivity differential between sectors and the tax rate will be pushed to the top of the Laffer curve over time. This paper also finds that the desire for redistribution will be crowded out by the impact of unbalanced growth and Baumol’s cost disease.

Keywords: Baumol's Cost Disease, Government Expenditures, Unbalanced Growth

JEL Classification: H40, H50, O41