Economic and Political Equilibria in Optimal Taxation. Is Incentive Compatibility Enough?

This paper is an attempt to describe the discal structure of State as an equilibrium of a non-cooperative game where decentralized agents play both political and economic strategies. We propose a theory of fiscal equilibria (describing features of direct and indirect taxation as well as of the expenditure side of the public intervention) arising from the voluntary interaction among decentralized and fully size of the public sector. Among the main results we show that: (i) the greater is the size of the public sector, the more income taxation prevails on expenditure taxation; (ii) the beter is the monitoring technology on tax evasion the larger the proportion of income over expediture taxation in the fiscal revenue; (iii) the larger labour income taxation, the larger the public budget; (iv) agents in group with larger labour income tend to attract more public subsidies unless they constitute a relatively small minority of the population; (v) self-seeking political activity has an ambiguous effect on different welfare indicators.