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What Constitutions Promote Capital Accumulation? A Political-Economy Approach

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Author Info

  • Per Krusell

    (University of Rochester)

  • José-Victor Ríos-Rull

    (University of Pennsylvania)

Abstract

With the standard neoclassical growth model and an assumption of sequential voting on tax rates, we derive predictions for actual tax outcomes as a function of, on the one hand, the distribution of wealth and, on the other, specific elements of the fiscal and political constitutions in the economy. More precisely, we study how the frequency of elections and the lag between policy decision and policy implementation influence equilibrium tax rates, economic growth, and welfare. We also let the degree of progressivity in the tax code be a parameter of the constitution, and we study how it influences outcomes. We find that constitutional change may lead to large, long-run effects on economic performance. In particular, we find that the more frequently taxes are voted on, and the shorter the policy implementation lag, the higher are taxes in equilibrium, and the lower is growth and welfare. We also find that the more progressive is the tax code, the weaker are the distortions implied by the political transfer system. However, the quantitative effects from changing the progressivity of the tax code are much smaller than those resulting from changing the timing of elections.

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Bibliographic Info

Paper provided by University of Rochester - Wallis Institute of Political Economy in its series Wallis Working Papers with number WP1.

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Length: pages
Date of creation: Dec 1994
Date of revision:
Handle: RePEc:roc:wallis:wp1

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Postal: University of Rochester, Wallis Institute, Harkness 109B Rochester, New York 14627 U.S.A.

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Cited by:
  1. Jose-Victor Rios-Rull & Per Krusell, 1999. "On the Size of U.S. Government: Political Economy in the Neoclassical Growth Model," American Economic Review, American Economic Association, vol. 89(5), pages 1156-1181, December.
  2. Mahieu, Géraldine & Rottier, Stéphane, 2000. "Preferences over Capital Income versus Labor Income Taxation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Giorgio Bellettini & Carlotta Berti Ceroni, 1995. "Is Social Security Really Bad For Growth?," Working Papers 218, Dipartimento Scienze Economiche, Universita' di Bologna.
  5. Selim, Sheikh, 2006. "On Policy Relevance of Ramsey Tax Rules," Cardiff Economics Working Papers E2006/19, Cardiff University, Cardiff Business School, Economics Section, revised Jul 2006.
  6. Teresa Garcia-Milà & Albert Marcet & Eva Ventura, 1995. "Supply side interventions and redistribution," Economics Working Papers 115, Department of Economics and Business, Universitat Pompeu Fabra.
  7. Jose-Victor Rios-Rull, 1997. "Computation of equilibria in heterogeneous agent models," Staff Report 231, Federal Reserve Bank of Minneapolis.
  8. Finn E. Kydland & D'Ann M. Petersen, 1997. "Does being different matter?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 2-11.

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