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Capital Taxation under Political Constraints

Listed author(s):
  • Florian Scheuer
  • Alexander Wolitzky

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough coalition of citizens supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when individuals' political behavior is purely determined by economic motives.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 106 (2016)
Issue (Month): 8 (August)
Pages: 2304-2328

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Handle: RePEc:aea:aecrev:v:106:y:2016:i:8:p:2304-28
Note: DOI: 10.1257/aer.20141081
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  1. Bertola, Giuseppe, 1993. "Factor Shares and Savings in Endogenous Growth," American Economic Review, American Economic Association, vol. 83(5), pages 1184-1198, December.
  2. Benhabib, Jess & Rustichini, Aldo, 1997. "Optimal Taxes without Commitment," Journal of Economic Theory, Elsevier, vol. 77(2), pages 231-259, December.
  3. Roland Benabou, 2000. "Unequal Societies: Income Distribution and the Social Contract," American Economic Review, American Economic Association, vol. 90(1), pages 96-129, March.
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  8. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  9. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-174, Fall.
  10. Assar Lindbeck & Jörgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, vol. 52(3), pages 273-297, January.
  11. Björn Tyrefors Hinnerich & Per Pettersson‐Lidbom, 2014. "Democracy, Redistribution, and Political Participation: Evidence From Sweden 1919–1938," Econometrica, Econometric Society, vol. 82(3), pages 961-993, 05.
  12. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  13. Florian Scheuer & Alexander Wolitzky, 2016. "Capital Taxation under Political Constraints," American Economic Review, American Economic Association, vol. 106(8), pages 2304-2328, August.
  14. Nicola Persico & Alessandro Lizzeri, 2001. "The Provision of Public Goods under Alternative Electoral Incentives," American Economic Review, American Economic Association, vol. 91(1), pages 225-239, March.
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  20. repec:cup:apsrev:v:87:y:1993:i:04:p:856-869_10 is not listed on IDEAS
  21. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
  22. Kotlikoff, Laurence J & Persson, Torsten & Svensson, Lars E O, 1988. "Social Contracts as Assets: A Possible Solution to the Time-Consistency Problem," American Economic Review, American Economic Association, vol. 78(4), pages 662-677, September.
  23. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  24. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
  25. Saint Paul, Gilles & Verdier, Thierry, 1997. "Power, Distributive Conflicts, and Multiple Growth Paths," Journal of Economic Growth, Springer, vol. 2(2), pages 155-168, July.
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