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Redistributive Taxation and PublicExpenditures

  • Sanghamitra Bandyopadhyay
  • Joan Esteban

We introduce a model of redistributive income taxation and publicexpenditure. Besides redistributing personal income by means of taxesand transfers, the government supplies goods and services. Thegovernment chooses the tax schedule that is found acceptable by thelargest share possible of the population. We show that there is a uniqueincome tax schedule that is universally acceptable. The progressivity ofthe income tax is shown to depend on the composition of the publicexpenditure and on the substitutability between the goods and servicessupplied by the government and the consumption goods privatelyobtained through the market. We test the empirical implications of themodel. Specifically, we use OECD data to observe the relationshipbetween marginal tax rates and the distribution over the taxpayers of thebenefits produced by the specific composition of the governmentexpenditure in the provision of goods and services. We confirm that forlower elasticities of substitution between public and private goods, thereis a negative relationship between marginal tax rates and pro-taxpayerbias,and for higher elasiticities, there is a positive relationship.

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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 95.

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Date of creation: Oct 2007
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Handle: RePEc:cep:stidar:95
Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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