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What do majority-voting politics say about redistributive taxation of consumption and factor income? Not much

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  • Jim Dolmas

Abstract

Tax rates on labor income, capital income and consumption-and the redistributive transfers those taxes finance-differ widely across developed countries. Can majority-voting methods, applied to a calibrated growth model, explain that variation? The answer I fund is yes, and then some. In this paper, I examine a simple growth model, calibrated roughly to U.S. data, in which the political decision is over constant paths of taxes on factor income and consumption, used to finance a lump-sum transfer. I first look at outcomes under probabilistic voting, and find that equilibria are extremely sensitive to the specification of uncertainty. I then consider other ways to restrict the range of majority-rule outcomes, looking at the model's implications for the shape of the Pareto set and the uncovered set, and the existence or non-existence of a Condorcet winner. Solving the model on discrete grid of policy choices, I find that no Condorcet winner exists and that the Pareto and uncovered sets, while small relative to the entire issue space, are large relative to the range of tax policies we see in data for a collection of 20 OECD countries. Taking that data as the issue space, I find that none of the 20 can be ruled out on efficiency grounds, and that 10 of the 20 are in the uncovered set. Those 10 encompass policies as diverse as those of the US, Norway and Austria. One can construct a Condorcet cycle including all 10 countries' tax vectors. ; The key features of the model here, as compared to other models on the endogenous determination of taxes and redistribution, is that the issue space is multidimensional and, at the same time, no one voter type is sufficiently numerous to be decisive. I conclude that the sharp predictions of papers in this literature may not survive an expansion of their issue spaces or the allowance for a slightly less homogeneous electorate.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0814.

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Date of creation: 2008
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Handle: RePEc:fip:feddwp:0814

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Keywords: Taxation ; Consumption (Economics) ; Income tax ; Fiscal policy;

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Cited by:
  1. Creedy, John & Moslehi, Solmaz, 2012. "The Composition of Government Expenditure with Alternative Choice Mechanisms," Working Paper Series 2433, Victoria University of Wellington, Chair in Public Finance.
  2. Daniel R. Carroll, 2013. "The demand for income tax progressivity in the growth model," Working Paper 1106, Federal Reserve Bank of Cleveland.

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