This paper studies majority voting on taxes when tax evasion is possible. We characterize the voting equilibrium where the agent with median taxed income is pivotal. Since the ranking of true incomes does not necessarily correspond to the ranking of taxed incomes, the decisive voter can differ from the median income receiver. In this case, we find unconventional patterns of redistribution, e.g. from the middle class to the poor and the rich. Furthermore, we show that majority voting can lead to an inefficiently low level of taxation – despite a right-skewed income distribution. Hence, the classical over-provision result might turn around, once tax evasion is taken into account.
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number
1188.
Find related papers by JEL classification: H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures D6 - Microeconomics - - Welfare Economics
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