Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: Two main results in traditional tax theory states the following. First, general taxes minimize the welfare loss from

changed relative prices. Second, because the total public budget tends to exceed the optimal size, a leader (here

named ‘troop leader’) is needed in the budget process to prevent over-taxation. Nevertheless, differentiated taxes

initiated by individual ministries generate a still larger proportion of total tax revenue, in particular under cover of

taxing externalities such as environmental pollution. We suggest that this situation leads to over-taxation for two

reasons. First, the absence of a strong and fully informed troop leader prevents rational coordination of collective

action. Second, budget maximization leads to overwhelming fiscal pressure because bureaucracies are competing

about resources just like fishermen or hunters (here named ‘bureaucratic tax-seeking’). Taxing citizens or firms is

like harvesting rents from a natural resource and therefore we apply a common-pool resource model. Because

bureaucracies compete about maximizing their share of tax payers‘ money, this leads to over-taxation and an

irrational outcome for both bureaucrats and society. These suggestions are strongly confirmed by the case of the

Danish waste tax. Thus, we recommend that bureaucratic institutions should coordinate their tax-seeking efforts

to maximize budgets in the long run and that the ministries that collect green tax revenues should not be allowed

to control these revenues. Such a budget maximization opportunity would kick off a new self-destructive fiscal

race among competing tax-seeking bureaucracies.

Keywords: Bureaucratic tax-seeking; Troop leader; Common-pool resource model; Green taxation; Waste tax

18 pages, January 1, 2000

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