Taxpayers' Behavior and the Flypaper Effect

Abstract

This paper provides a new explanation for the flypaper effect, a well known empirical result whereby transfers to a government increase public expenditures more than an equal amount of additional taxpayers' income. The flypaper effect is fully explained by taxpayers' behavioral responses to the tax rate and income. A lump-sum increase in income is shown to lead to three effects on optimal government decisions that have not yet been described in the literature. The flypaper effect arises simply because public expenditures are cheaper when financed with intergovernmental transfers.