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Rent Seeking and the Excess Burden of Taxation

Author

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  • Kahana, Nava

    (Bar-Ilan University)

  • Klunover, Doron

    (Bar-Ilan University)

Abstract

The social costs of rent seeking are generally evaluated with respect to rent dissipation. A common assumption is complete rent dissipation so that the value of a contested rent is the value of social loss. When rent seekers earn taxable income, there is interdependence between the social cost of rent seeking through rent dissipation and the excess burden of taxation. Through the addition of substitution to rent seeking beyond leisure, rent seeking increases the excess burden of taxation under risk neutrality when leisure is non-inferior. We derive a condition for rent seeking to increase the excess burden of taxation under risk aversion. Our conclusion is that, when rent seekers can earn taxable income, rent seeking is more socially costly than is inferred from contest models alone, because of an increased excess burden of taxation.

Suggested Citation

  • Kahana, Nava & Klunover, Doron, 2014. "Rent Seeking and the Excess Burden of Taxation," IZA Discussion Papers 8160, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp8160
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    6. Arye Hillman & Ngo Van Long, 2017. "The social cost of contestable benefits," CIRANO Working Papers 2017s-11, CIRANO.

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    More about this item

    Keywords

    size of government; welfare cost of taxation; excess burden of taxation; rent seeking;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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