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Public Spending and Taxation with Non-cooperative Families

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  • Dan Anderberg
  • Alessandro Balestrino

Abstract

We develop a political economy model of income taxation and public spending, in which we pay special attention to the composition of the latter. The significant economic unit is taken to be the household. Each household is made of two agents, positively sorted by wage, who engage in the non-cooperative home production of a household public good. This leads to an inefficient laissez-faire equilibrium. We consider three policy instruments, a tax rate on labour income, and two types of transfer to the household (cash versus in-kind). The in-kind transfer is one of the inputs in the home production process. Since the pre-intervention equilibrium is inefficient, there is a general consensus among the agents that some corrective taxation is needed; however, those at bottom of the income distribution, who prefer a redistributive (as opposed to corrective) policy, favour a combination of high taxes and cash transfers, while those at the top would rather have low taxes and in-kind provision. Assuming, as seems plausible according to the empirical evidence, that political participation and income are positively correlated, we find that the decisive agent, i.e. the one whose preferred policy wins at the political equilibrium, has income above the mean. (JEL codes: D13, D72, H31) Copyright The Author 2011. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 2 (June)
Pages: 259-282

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:2:p:259-282

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Cited by:
  1. Konrad, Kai A. & Lommerud, Kjell Erik, 2008. "Love and taxes - and matching institutions," Working Papers in Economics 03/08, University of Bergen, Department of Economics.
  2. Zohal Hessami & Silke Uebelmesser, 2012. "Empirical Determinants of In-kind Redistribution: Partisan Biases and the Role of Inflation," Working Paper Series of the Department of Economics, University of Konstanz 2012-20, Department of Economics, University of Konstanz.
  3. Haizhen Mou & Stanley L. Winer, 2012. "Fiscal Incidence when both Individual Welfare and Family Structure Matter: The Case of Subsidization of Home-Care for the Elderly," CESifo Working Paper Series 3731, CESifo Group Munich.

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