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The politics of progressive income taxation with incentive effects

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  • DE DONDER, Philippe
  • HINDRIKS, Jean

Abstract

This paper studies majority voting over non-linear income taxes when individuals respond to taxation by substituting untaxable leisure to taxable labor (incentive effects). We first show that voting cycle over progressive and regressive taxes is inevitable. This is because the middle-class can always lower its tax burden at the expense of the rich by imposing progressive taxes (convex tax function) while the rich and the poor can reduce their tax burden by imposing regressive taxes (concave tax function). We then investigate three solutions to this cycling problem: (i) reducing the policy space to the policies that are ideal for some voter; (ii) weakening the voting equilibrium concept; (iii) assuming parties also care about the size of their majority. The main results is that progressivity emerges as a voting equilibrium if there is a lack of polarization at the extremes of the income distribution. Interestingly the poor would prefer regressive taxes.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1673.

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Handle: RePEc:cor:louvrp:-1673

Note: In : Journal of Public Economics, 87, 2491-2505, 2003
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  18. De Donder, Philippe & Le Breton, Michel & Truchon, Michel, 2000. "Choosing from a weighted tournament1," Mathematical Social Sciences, Elsevier, vol. 40(1), pages 85-109, July.
  19. Philippe De Donder & Jean Hindriks, 1998. "The political economy of targeting," Public Choice, Springer, vol. 95(1), pages 177-200, April.
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Citations

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Cited by:
  1. Philippe De Donder & Jean Hindriks, 2004. "Majority Support for Progressive Income Taxation with Corner Preferences," Public Choice, Springer, vol. 118(3_4), pages 437-449, 03.
  2. Bierbrauer, Felix J. & Boyer, Pierre C., 2013. "Political competition and Mirrleesian income taxation: A first pass," Journal of Public Economics, Elsevier, vol. 103(C), pages 1-14.
  3. Jenny De Freitas, 2009. "A Probabilistic Voting Model of Progressive Taxation with Incentive Effects," DEA Working Papers 34, Universitat de les Illes Balears, Departament d'Economía Aplicada.
  4. Esteban Klor, 2002. "A Positive Model of Overlapping Income Taxation in a Federation of States," Wallis Working Papers WP32, University of Rochester - Wallis Institute of Political Economy.
  5. Rafael Salas & Juan Rodríguez, 2013. "Popular support for social evaluation functions," Social Choice and Welfare, Springer, vol. 40(4), pages 985-1014, April.
  6. Hindriks, Jean, 2001. "Is there a demand for income tax progressivity?," Economics Letters, Elsevier, vol. 73(1), pages 43-50, October.
  7. Soumyanetra Munshi, 2011. "On existence of pure strategy equilibrium with endogenous income," Social Choice and Welfare, Springer, vol. 37(1), pages 1-37, June.
  8. Oriol Carbonell-Nicolau, 2007. "A Positive Theory of Income Taxation," Departmental Working Papers 200706, Rutgers University, Department of Economics.
  9. Rafael Salas & Juan Gabriel Rodríguez, 2010. "Popular support for egalitarian social welfare," Working Papers 171, ECINEQ, Society for the Study of Economic Inequality.
  10. Georges Casamatta & Helmuth Cremer & Philippe De Donder, 2010. "Repeated electoral competition over nonlinear income tax schedules," Social Choice and Welfare, Springer, vol. 35(4), pages 535-574, October.
  11. John Roemer, 2012. "The political economy of income taxation under asymmetric information: the two-type case," SERIEs, Spanish Economic Association, vol. 3(1), pages 181-199, March.
  12. Klor, Esteban F., 2006. "A positive model of overlapping income taxation in a federation of states," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 703-723, May.
  13. Felix Bierbrauer & Pierre C. Boyer, 2014. "Efficiency, Welfare, and Political Competition," CESifo Working Paper Series 4814, CESifo Group Munich.

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