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The Politics of Flat Taxes

Author

Listed:
  • James Dolmas
  • Eric R. Young

    (Carnegie Mellon University
    University of Virginia)

  • Daniel R. Carroll

Abstract

We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the transfer (and thus other tax rates) low. We also show that the outcome is sensitive to assumptions about the voting power of household groups, the degree of wealth and income mobility, and the forward-looking nature of votes.

Suggested Citation

  • James Dolmas & Eric R. Young & Daniel R. Carroll, 2019. "The Politics of Flat Taxes," Working Papers 144202, Federal Reserve Bank of Cleveland, revised 25 Sep 2019.
    • Handle: RePEc:fip:fedcwq:144202
    DOI: 10.26509/frbc-wp-201442r2
    Note: First version December 2014, with the title, “Majority Voting: A Quantitative Investigation.” First revision September 2017 with the current title.
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    Cited by:

    1. Daniel Carroll & Sewon Hur, 2019. "On the Heterogeneous Welfare Gains and Losses from Trade," 2019 Meeting Papers 1358, Society for Economic Dynamics.

    More about this item

    Keywords

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

    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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