Poverty, taxation and governance
In a simple model based on political support approach, we show that poor and less egalitarian societies may impose a lower tax rate contrary to the prediction of the median voter approach. This is consistent with the available empirical findings. In the framework developed in this paper, the government can strategically design a weak governance system to promote informal activities for the poor. This constitutes an alternative redistributive strategy other than the standard tax-transfer policy. The government chooses the tax rate and the degree of governance simultaneously to maximize the average income of the poor in the informal sector of the economy, i.e. those who constitute the majority and help in winning the election.
Volume (Year): 15 (2006)
Issue (Month): 3 ()
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- Persson, T. & Tabellini, G., 1997.
"Political Economics and Macroeconomic Policy,"
630, Stockholm - International Economic Studies.
- Torsten Persson & Guido Tabellini, . "Political Economics and Macroeconomic Policy," Working Papers 121, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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- Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
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