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Redistributive taxation and public expenditures

  • Sanghamitra Bandyopadhyay
  • Joan Esteban

We introduce a model of redistributive income taxation and public expenditure. Besides redistributing personal income by means of taxes and transfers, the government supplies goods and services. The government chooses the tax schedule that is found acceptable by the largest share possible of the population. We show that there is a unique income tax schedule that is universally acceptable. The progressivity of the income tax is shown to depend on the composition of the public expenditure and on the substitutability between the goods and services supplied by the government and the consumption goods privately obtained through the market. We test the empirical implications of the model. Specifically, we use OECD data to observe the relationship between marginal tax rates and the distribution over the taxpayers of the benefits produced by the specific composition of the government expenditure in the provision of goods and services. We confirm that for lower elasticities of substitution between public and private goods, there is a negative relationship between marginal tax rates and pro-taxpayerbias, and for higher elasiticities, there is a positive relationship.

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File URL: http://eprints.lse.ac.uk/6537/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 6537.

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Length: 47 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:ehl:lserod:6537
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Web page: http://www.lse.ac.uk/

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