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The Politics of Progressive Income Taxation with Incentive Effects

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Author Info
Philippe De Donder (IDEI, University of Toulouse 1)
Jean Hindriks (Queen Mary and Westfield College, University of London)

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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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Paper provided by Queen Mary, University of London, Department of Economics 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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Related research
Keywords: Majority voting; Income taxation; Tax progressivity;

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Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior

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  1. 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. [Downloadable!] (restricted)
  2. Oriol Carbonell-Nicolau, 2007. "A Positive Theory of Income Taxation," Departmental Working Papers 200706, Rutgers University, Department of Economics. [Downloadable!]
    Other versions:
  3. Jenny de Freitas, 2009. "A probabilistic voting model of progressive taxation with incentive effects," Hacienda Pública Española, IEF, vol. 190(3), pages 9-26, September. [Downloadable!]
  4. DE DONDER, Philippe & HINDRIKS, Jean, 2003. "Majority support for progressive income taxation with corner preferences," CORE Discussion Papers 2003002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  5. 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. [Downloadable!]
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