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Redistributive Taxation, PublicExpenditure and the Size of Government

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  • Sanghamitra Bandyopadhyay
  • Joan Esteban

Abstract

We introduce a model of redistributive income taxation and public expenditure. Thisjoint treatment permits analyzing the interdependencies between the two policies: onecannot be chosen independently of the other. Empirical evidence reveals that partisanconfrontation essentially falls on expenditure policies rather than on income taxation.We examine the case in which the expenditure policy (or the size of government) ischosen by majority voting and income taxation is consistently adjusted. Thisadjustment consists of designing the income tax schedule that, given the expenditurepolicy, achieves consensus among the population. The model determines theconsensus income tax schedule, the composition of public expenditure and the size ofgovernment. The main results are that inequality is negatively related to the size ofgovernment and to the pro-rich bias in public expenditure, and positively ornegatively related to the marginal income tax, depending on substitutability betweengovernment supplied and market goods. These implications are validated usingOECD data.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 095.

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Date of creation: Dec 2009
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Handle: RePEc:cep:stidar:095

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: Government policy; Income Taxation; Public Expenditure;

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