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Optimal Taxation and Strategic Budget Deficit Under Political Regime Switching


  • David Martimort


I develop a dynamic political economy theory of optimal taxation and budget distortions in a model with partisan politics. Under asymmetric information, politics affects the distribution of utilities in the economy. Political regime switching introduces fluctuations of this distribution. These fluctuations justify strategic budget distortions by governments currently holding office and willing to favour their redistributive concerns against future majority. Under quite general assumptions on preferences, these distortions take the form of budget deficits (resp. surpluses) with leftist (rightist) governments. Endogenizing the probabilities of getting elected may reverse this result.

Suggested Citation

  • David Martimort, 2001. "Optimal Taxation and Strategic Budget Deficit Under Political Regime Switching," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 573-592.
  • Handle: RePEc:oup:restud:v:68:y:2001:i:3:p:573-592.

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    Cited by:

    1. Amir, Hidayat & Asafu-Adjaye, John & Ducpham, Tien, 2013. "The impact of the Indonesian income tax reform: A CGE analysis," Economic Modelling, Elsevier, vol. 31(C), pages 492-501.
    2. David Martimort & Philippe De Donder & Etienne Billette de Villemeur, 2005. "An Incomplete Contract Perspective on Public Good Provision," Journal of Economic Surveys, Wiley Blackwell, vol. 19(2), pages 149-180, April.
    3. Felix J. Bierbrauer & Pierre C. Boyer, 2016. "Efficiency, Welfare, and Political Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 131(1), pages 461-518.
    4. Laffont, Jean-Jacques & Martimort, David, 2005. "The design of transnational public good mechanisms for developing countries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 159-196, February.
    5. Jens Peter Siebel, 2005. "Budget deficit, size of the public sector and majority voting," Volkswirtschaftliche Diskussionsbeiträge 120-05, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    6. Strausz, Roland, 2017. "Politically induced regulatory risk and independent regulatory agencies," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 215-238.
    7. Sebastian G. Kessing & Benny Schneider, 2014. "Regional Investment and Individual Redistribution in a Federation," Volkswirtschaftliche Diskussionsbeiträge 168-14, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    8. Bierbrauer, Felix J. & Boyer, Pierre C., 2013. "Political competition and Mirrleesian income taxation: A first pass," Journal of Public Economics, Elsevier, vol. 103(C), pages 1-14.
    9. Goeminne Stijn & Smolders Carine, 2010. "Strategic Use of Debt in Flemish Municipalities," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-31, July.

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