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The Politics of Flat Taxes

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Abstract

We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors?the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting?in determining the equilibrium mix of taxes.

Suggested Citation

  • Daniel R. Carroll & Jim Dolmas & Eric R. Young, 2017. "The Politics of Flat Taxes," Working Papers 201442R, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:144201
    DOI: 10.26509/frbc-wp-201442r
    Note: First version December 2014, with the title, “Majority Voting: A Quantitative Investigation.”
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    Cited by:

    1. Carroll, Daniel R. & Hur, Sewon, 2020. "On the heterogeneous welfare gains and losses from trade," Journal of Monetary Economics, Elsevier, vol. 109(C), pages 1-16.
    2. Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 202018, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Political Economy; Incomplete Markets; Essential Set; Inequality; Voting;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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