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The Politics of Progressive Income Taxation with Incentive Effects

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  • Philippe De Donder

    (IDEI, University of Toulouse 1)

  • Jean Hindriks

    (Queen Mary and Westfield College, University of London)

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 Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 416.

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Date of creation: Jul 2000
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Handle: RePEc:qmw:qmwecw:wp416

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Keywords: Majority voting; Income taxation; Tax progressivity;

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References

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  1. Kramer, Gerald H., 1977. "A dynamical model of political equilibrium," Journal of Economic Theory, Elsevier, vol. 16(2), pages 310-334, December.
  2. John E. Roemer, . "The Democratic Political Economy Of Progressive Income Taxation," Department of Economics 97-11, California Davis - Department of Economics.
  3. David Epstein, 1997. "Uncovering some subtleties of the uncovered set: Social choice theory and distributive politics," Social Choice and Welfare, Springer, vol. 15(1), pages 81-93.
  4. 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.
  5. Francisco Marhuenda & Ignacio Ortuño Ortín, 1995. "Popular Support For Progressive Taxation," Working Papers. Serie AD 1995-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. J-F. Laslier & A. Trannoy & K. Van Der Straeten, 2000. "Voting Under Ignorance of Job Skills of Unemployed : The Overtaxation bias," THEMA Working Papers 2000-38, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  7. Young, H Peyton, 1990. "Progressive Taxation and Equal Sacrifice," American Economic Review, American Economic Association, vol. 80(1), pages 253-66, March.
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  9. De Donder, Philippe & Hindriks, Jean, 1998. " The Political Economy of Targeting," Public Choice, Springer, vol. 95(1-2), pages 177-200, April.
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  12. De Donder, Philippe & Le Breton, Michel & Truchon, Michel, 1998. "Choosing from a Weighted Tournament," Cahiers de recherche 9815, Université Laval - Département d'économique.
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  19. Jean-FranÚois Laslier, 2000. "Interpretation of electoral mixed strategies," Social Choice and Welfare, Springer, vol. 17(2), pages 283-292.
  20. Philippe De Donder, 2000. "Majority voting solution concepts and redistributive taxation," Social Choice and Welfare, Springer, vol. 17(4), pages 601-627.
  21. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
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Citations

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Cited by:
  1. 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.
  2. DE DONDER, Philippe & HINDRIKS, Jean, . "Majority support for progressive income taxation with corner preferences," CORE Discussion Papers RP -1691, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Casamatta, Georges & Cremer, Helmuth & De Donder, Philippe, 2008. "Repeated electoral competition over non-linear income tax schedules," CEPR Discussion Papers 7054, C.E.P.R. Discussion Papers.
  4. Hindriks, Jean, 2001. "Is there a demand for income tax progressivity?," Economics Letters, Elsevier, vol. 73(1), pages 43-50, October.
  5. Carbonell-Nicolau Oriol, 2009. "A Positive Theory of Income Taxation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-49, July.
  6. Rafael Salas & Juan Gabriel Rodríguez, 2010. "Popular support for egalitarian social welfare," Working Papers 171, ECINEQ, Society for the Study of Economic Inequality.
  7. Felix J. Bierbrauer & Pierre C. Boyer, 2010. "Political Competition and Mirrleesian Income Taxation: A First Pass," CESifo Working Paper Series 3294, CESifo Group Munich.
  8. Felix Bierbrauer & Pierre C. Boyer, 2014. "Efficiency, Welfare, and Political Competition," CESifo Working Paper Series 4814, CESifo Group Munich.
  9. 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.
  10. 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.
  11. Rafael Salas & Juan Rodríguez, 2013. "Popular support for social evaluation functions," Social Choice and Welfare, Springer, vol. 40(4), pages 985-1014, April.
  12. 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.
  13. Soumyanetra Munshi, 2011. "On existence of pure strategy equilibrium with endogenous income," Social Choice and Welfare, Springer, vol. 37(1), pages 1-37, June.

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