Nonlinear Labor Income Taxation Under a Political Constraint

Rising political polarization raises a question for redistributive policy: How does a requirement to secure middle‐class support reshape optimal nonlinear income taxation under sharply different social objectives? We model political feasibility as a participation constraint for the median skill type and compare maxi‐min, maxi‐max, and weighted‐utilitarian tax design. The key innovation is to solve the resulting mechanism‐design problem when the first‐order approach fails, and the monotonicity constraint generates endogenous bunching around the median type. Tightening the political constraint reduces income inequality under both extreme objectives, but through opposite tax adjustments. Under maxi‐min, marginal tax rates fall for low and middle incomes, and middle‐class pre‐tax income rises. Under maxi‐max, marginal tax rates rise for middle and high incomes, and middle‐class pre‐tax income falls. Under stated regularity and sign conditions, weighted utilitarianism combines these responses: marginal tax rates fall below the bunching region and rise above it, so pre‐tax income rises for low and bunched types and falls for high types. Thus, stronger outside options for the middle‐class compress inequality, although their income gains depend critically on the policymaker's redistributive objective.