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Equilibrium Tax Rates under Ex-ante Heterogeneity and Income-dependent Voting

Author

Listed:
  • Chang Bo Hyun

    (Ministry of Economy and Finance of Korea, Seoul, Korea)

  • Chang Yongsung

    (Seoul National University, Gwanak-gu, Korea)

  • Kim Sun-Bin

    (Yonsei University, Seoul, Korea)

Abstract

The standard models with incomplete markets (e.g. Aiyagari) have difficulty justifying the current income tax rates as an optimal or political equilibrium outcome. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that incorporating (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior helps us to reconcile the large gap between the model and data.

Suggested Citation

  • Chang Bo Hyun & Chang Yongsung & Kim Sun-Bin, 2022. "Equilibrium Tax Rates under Ex-ante Heterogeneity and Income-dependent Voting," The B.E. Journal of Macroeconomics, De Gruyter, vol. 22(2), pages 547-573, June.
    • Handle: RePEc:bpj:bejmac:v:22:y:2022:i:2:p:547-573:n:12
    DOI: 10.1515/bejm-2020-0274
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    More about this item

    Keywords

    ex-ante heterogeneity; optimal tax; voter turnout rates;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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