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Politicians, Taxes and Debt

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  • Pierre Yared

Abstract

The standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent-seeking politicians. This paper departs from this framework by assuming that a rent-seeking politician chooses policies. If the politician chooses extractive policies, citizens throw him out of power. We analyse the efficient sustainable equilibrium. Unlike in the standard economy, temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path. This serves to optimally limit rent-seeking by the politician and to optimally generate support for the politician from the citizens. Taxes resembling those of the benevolent government are very costly since the government over-saves and resources are wasted on rents. Political distortions thus cause the complete debt market to behave as if it were incomplete. However, in contrast to an incomplete market economy, in the long run, taxes do not converge to zero, and under some conditions, they resemble taxes under a benevolent government. Copyright , Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 77 (2010)
Issue (Month): 2 ()
Pages: 806-840

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Handle: RePEc:oup:restud:v:77:y:2010:i:2:p:806-840

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Cited by:
  1. C├ęsar Martinelli & John Duggan, 2014. "The Political Economy of Dynamic Elections: A Survey and Some New Results," Working Papers, Centro de Investigacion Economica, ITAM 1403, Centro de Investigacion Economica, ITAM.
  2. Ricardo J. Caballero & Pierre Yared, 2008. "Future Rent-Seeking and Current Public Savings," NBER Working Papers 14417, National Bureau of Economic Research, Inc.
  3. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7-8), pages 467-475, August.
  4. Barseghyan, Levon & Battaglini, Marco & Coate, Stephen, 2013. "Fiscal policy over the real business cycle: A positive theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2223-2265.
  5. Dai, Darong, 2013. "Cooperative economic growth," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 407-415.
  6. Dai, Darong, 2012. "Comparative Studies on Cooperative Stochastic Differential Game and Dynamic Sequential Game of Economic Maturity," MPRA Paper 44339, University Library of Munich, Germany.
  7. Battaglini, Marco, 2011. "A Dynamic theory of electoral competition," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8633, C.E.P.R. Discussion Papers.
  8. Halac, Marina & Yared, Pierre, 2013. "Fiscal Rules and Discretion under Persistent Shocks," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 1014, University of Warwick, Department of Economics.
  9. Facundo Piguillem & Alessandro Riboni, 2013. "Spending Biased Legislators - Discipline Through Disagreement," EIEF Working Papers Series, Einaudi Institute for Economics and Finance (EIEF) 1317, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2013.
  10. Arai, Real & Naito, Katsuyuki, 2014. "A Politico-economic Approach on Public Debt in an Endogenous Growth Economy," MPRA Paper 56213, University Library of Munich, Germany.
  11. Marina Halac & Pierre Yared, 2012. "Fiscal Rules and Discretion under Persistent Shocks," NBER Working Papers 18545, National Bureau of Economic Research, Inc.
  12. Jean Guillaume Forand & John Duggan, 2014. "Markovian Elections," 2014 Meeting Papers, Society for Economic Dynamics 153, Society for Economic Dynamics.
  13. Jean Guillaume Forand & John Duggan, 2013. "Markovian Elections," Working Papers, University of Waterloo, Department of Economics 1305, University of Waterloo, Department of Economics, revised Oct 2013.

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