Rent seeking and the excess burden of taxation

- Rent seeking increases the excess burden of taxation.
- Rent seeking is more socially costly than is inferred from contest models alone.
- Our results suggest a smaller government when rent seeking is present.

The social costs of rent seeking and the excess burden of taxation have been studied and evaluated independently. We show that, when rent seekers earn taxable income, there is interdependence between the two types of social losses. 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. 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.