Is there a limit to the size of the state? The scope conditions of Wagner's law

Abstract

We investigate the relationship between economic development and the growth of the state by testing Wagner's Law. We begin with a general test, and find it does not hold in all cases: it breaks down at higher levels of development and in more recent time periods. This suggests that Wagner's law has specific scope conditions, beyond which states do not continue to grow as economies grow. We use a series of models to explore the temporal scope of Wagner's law and the point at which state growth may hit a ceiling. We conclude limits on the growth of the state are set by limits on the capacity of states to increase taxation. States can avoid this problem temporarily by running budget deficits, but eventually accumulated debt forces them to cut expenditures. Spending is tied to tax revenue like a rubber band, it can stretch only so far before being pulled back.

Breaking Wagner's Law: Which Countries Have the Most Limited Government?

“…There is any visible differentiation at all between the fitted values for each specification only at extremely low or extremely high levels of economic output. To some extent, this curvature is contradicting the findings of Karceski and Kiser (2020), because it implies that higher levels of GDP per capita increase government consumption and transfers and subsidies at increasing rates. Ultimately, the benefits of the added complication are so minimal (as well as the general concern about overfitting) that it was determined to stick to the linear specification.…”

“…This is not only demonstrated by the United States and capitalistic city-states like Hong Kong or Singapore, but also by developing countries that have socialized large portions of their economy. Moreover, Wagner's law may be limited, if by nothing else, then by an upper bound reached by the Nordic states and other large welfare states as they scrape at the ceiling of how large states can get while maintaining a modicum of economic growth and other dimensions of economic performance (Karceski and Kiser 2020;c.f. Norberg 2020).…”

Fiscal capacity in non-democratic states: the origins and expansion of the income tax

“…In the models that follow I therefore control for whether a country was involved in a war using data from V-Dem (Coppedge et al, 2020, based on Brecke, 2001. Another important factor is economic development, affecting taxation (Karceski and Kiser, 2020) as well as political institutions (Lipset, 1959). I control for GDP per capita (logged) using data from Bolt et al (2018).…”

Explaining willingness to pay taxes: The role of income, education, ideology

“…Governments wishing to significantly increase social spending face a conundrum: clear majorities of citizens want higher public social spending, but they seem unwilling to increase their own tax burden to pay for it. Indeed, while social expenditures are slowly rising, tax revenues are stagnating in advanced democracies (Karceski and Kiser, 2020). We know from public opinion research that the majority of citizens desire additional public spending but prefer to limit tax increases to high-income citizens (Barnes, 2015).…”