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Capital Taxation under Political Constraints

Listed author(s):
  • Scheuer, Florian
  • Wolitzky, Alexander

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when the salient reform threat consists of radically redistributing capital and individuals' political behavior is purely determined by economic motives.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10418.

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Date of creation: Feb 2015
Handle: RePEc:cpr:ceprdp:10418
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