Income Taxes, Political Accountability and Public Goods Provision

This paper proposes and analyzes an unexplored mechanism through which in- creases in income taxes -understood as increases in either marginal tax rates or tax progressivity- might positively affect the degree of political accountability (PA), and consequently, the provision of public goods (PG) in a democratic environment. To do this, we build a voting-agency model with income-heterogeneous voters and different tax schedules. Our main result is that, in fact, the provided mechanism uncovers a direct link between income taxes and the degree of PA. A crucial condition for observing a positive effect of an increase in income taxes on both voters' political demands for PG and the provision of PG is that said increase must negatively affect the median voter's disposable income. If this does not occur, which may well be the case in low-income countries, the effect of an increase in income taxes on the degree of PA is ambiguous. We also explore how agency problems a affect the majority-voting equilibrium income tax rate.