The paper draws attention to the interdependence of regulation and taxation. We analyze the nature of policy equilibrium, as well as the implications of three historically important political and economic shocks, for the joint use of the two policy instruments in a framework that embodies relationships common in the literature on political economy. Regulation is represented by barriers to entry created by the government for a favored industry. Among the results are the following: the introduction of new methods of communication in politics, such as television advertising, leads to increased taxation of the average voter, greater entry barriers in private markets and greater resource use for campaign advertising, with the elasticity of supply in the regulated industry playing a crucial role. Growth in the labor force participation of women, on the other hand, lowers business tax rates, while resulting in more regulation and higher contributions of political resources. The paper concludes with a consideration of the efficiency of policy equilibrium and the analytical problems that arise in evaluating efficiency in such a context.

Additional Metadata
Keywords regulation, taxation, policy interdependence, political advertising, efficiency of political equilibrium
JEL Positive Analysis of Policy-Making and Implementation (jel D78), Taxation, Subsidies, and Revenue: General (jel H20), Efficiency; Optimal Taxation (jel H21), Regulated Industries and Administrative Law (jel K23), Regulation and Industrial Policy: General (jel L50)
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Hettich, Walter, & Winer, S.L. (2003). Regulation and Taxation: Analyzing Policy Interdependence (No. CEP 04-03). Carleton Economic Papers. Department of Economics.