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Redistributive taxation and public expenditures

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  • Bandyopadhyay, Sanghamitra
  • Esteban, Joan

Abstract

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.

Suggested Citation

  • Bandyopadhyay, Sanghamitra & Esteban, Joan, 2007. "Redistributive taxation and public expenditures," LSE Research Online Documents on Economics 6537, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:6537
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    Cited by:

    1. Carbonell-Nicolau Oriol, 2009. "A Positive Theory of Income Taxation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-49, July.
    2. Joan Esteban & Laura Mayoral, 2013. "A Politico-Economic Model of Public Expenditure and Income Taxation," Working Papers 743, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    Government policy; Income Taxation; Public Expenditure;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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