Last, what about equilibrium taxes? Recall that taxes are proposed by the taxation committee, at = ae. The voters of this legislator do not benefit from additional tax revenue beyond what is necessary for financing the equilibrium supply of the public good and minimum rents. Additional taxes go either to redistribution for district i = ae, or to rents for the politicians. These voters thus want to keep taxes at a minimum. Likewise, legislator at has only limited claims on tax revenue. He is therefore pleased to satisfy his voters and go along with low taxes, so as to earn re-election. In other words, neither at, nor the voters re-electing him, are residual claimants of a larger budget. As a result, equilibrium taxes are relatively low and unambiguously:
t < 1. That is, voters exploit the separation of powers to discipline politicians and enforce a small size of government website.
We can summarize these results as follows. Presidential regimes induce strong competition among the voters, implying redistribution towards a minority. This, in turn, raises the opportunity cost for public goods which are severely underprovided.. Voters not benefiting from the minoritarian redistribution demand low taxes. Presidential regimes, with their separation of powers, also entail strong competition between incumbent politicians. This conflict can be exploited by the voters to limit the agency problem. Together, these features imply relatively low taxes and a small size of government.
We now turn to “parliamentary” regimes. There are two central features of such regimes: proposal powers over legislation rest mainly with the government, and, government survival depends on the support of a majority in the assembly. These two features give the majority coalition strong incentives to stick together; a break up could lead to a government crisis and result in the loss of valuable proposal powers. In the language of Diermeier and Feddersen (1998), parliamentary systems exhibit legislative cohesion, a tendency towards stable coalitions in the assembly. This could be reflected either in party discipline—that is, cohesion between different factions within a party—or in the stability of coalitions made up of different parties.
To capture these features, we modify the previous game in two important respects. First, we assign veto rights to the two members of the majority coalition over the final policy package. Second, a costly outcome (i.e. a government crisis) is triggered for the majority coalition if the veto is exercised. As a result, the agenda setter is not free to seek support from the legislator who is ’’cheapest to buy”, but needs to please his coalition partner. The timing is illustrated in Figure 4. Two different (exogenously appointed) legislators, labeled at and ae, control the proposals on taxes and expenditures. One may think of these as cabinet ministers. No vote is taken, however, until both proposals have been made. A veto by any of the coalition partners triggers a government crisis, which leads to a low expected utility both for the politicians and the voters. These assumptions approximate the proposals being made by cabinet ministers in a budget preparation phase inside the government, with a vote of confidence being attached to the final budget proposal.