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The Politics of Flat Taxes

Author

Listed:
  • Daniel Carroll

    (Federal Reserve Bank of Cleveland)

  • Jim Dolmas

    (Federal Reserve Bank of Dallas)

  • Eric Young

    (University of Virginia)

Abstract

We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes. (Copyright: Elsevier)

Suggested Citation

  • Daniel Carroll & Jim Dolmas & Eric Young, 2021. "The Politics of Flat Taxes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 174-201, January.
  • Handle: RePEc:red:issued:18-193
    DOI: 10.1016/j.red.2020.06.016
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    1. Carroll, Daniel R. & Hur, Sewon, 2020. "On the heterogeneous welfare gains and losses from trade," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 1-16.
    2. Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 20-18R, Federal Reserve Bank of Cleveland, revised 15 Feb 2022.

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    More about this item

    Keywords

    Incomplete markets; Political economy; Voting; Uncovered set; Inequality;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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