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Repeated electoral competition over non-linear income tax schedules

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  • Casamatta, Georges
  • Cremer, Helmuth
  • De Donder, Philippe

Abstract

We consider a repeated electoral competition game between two parties, each representing a constituent with a given income level. Parties are unable to commit to any policy before the election; they choose a non-linear income tax schedule once elected. In each period, citizens cast a vote either for the incumbent or for the challenger. We first show that there exist (pure strategy) subgame perfect equilibria where both parties choose the most-preferred tax schedule of their constituent, subject to the constraint that they are reelected. We characterize a specific class of these BPR (Best Policy with Reelection) equilibria in which one of the parties plays its constituent's unconstrained optimal tax function. Equilibrium tax schedules are always piecewise linear. Depending on the income levels of the two parties' constituents, we obtain either classical left-vs-right equilibria (where poorer people vote for one party and richer people for the other one) or ends-against-the-middle equilibria (where both poor and rich people vote for one party while the middle class vote for the other party). In both types of equilibria both parties propose the same tax schedule to a subset of the population.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7054.

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Date of creation: Nov 2008
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Handle: RePEc:cpr:ceprdp:7054

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Keywords: ends-against-the-middle; no commitment; piecewise linear income tax; Postelection politics;

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References

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  1. John Duggan & Jeffrey S. Banks, 2008. "A Dynamic Model of Democratic Elections in Multidimensional Policy Spaces," Wallis Working Papers WP53, University of Rochester - Wallis Institute of Political Economy.
  2. John Duggan, . "Repeated Elections with Asymmetric Information," Wallis Working Papers WP9, University of Rochester - Wallis Institute of Political Economy.
  3. Carbonell-Nicolau, Oriol & Ok, Efe A., 2007. "Voting over income taxation," Journal of Economic Theory, Elsevier, vol. 134(1), pages 249-286, May.
  4. Duggan, John & Fey, Mark, 2005. "Electoral competition with policy-motivated candidates," Games and Economic Behavior, Elsevier, vol. 51(2), pages 490-522, May.
  5. De Donder, Philippe & Hindriks, Jean, 2003. "The politics of progressive income taxation with incentive effects," Journal of Public Economics, Elsevier, vol. 87(11), pages 2491-2505, October.
  6. Henning Bohn & Charles Stuart, 2003. "Voting and Nonlinear Taxes in a Stylized Representative Democracy," CESifo Working Paper Series 1058, CESifo Group Munich.
  7. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
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Cited by:
  1. Felix Bierbrauer & Pierre C. Boyer, 2010. "Political competition and Mirrleesian income taxation: A first pass," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_45, Max Planck Institute for Research on Collective Goods.
  2. 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.

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