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Tax avoidance and the political appeal of progressivity

  • Matias Nunez

    (CECO - Laboratoire d'econometrie de l'école polytechnique - CNRS - Polytechnique - X)

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    Different theories have attempted to explain why contemporary societies have adopted marginal-rate progressive taxation schemes. One possible way of justifying this fact is to interpret the choice of a taxation scheme as the outcome of a political game between two office-seeking Downsian political parties. One can think that in such a game the existence of a majority of relatively poor voters will be enough to justify this choice. However, recent results show that at equilibrium self-interested voters do not always choose marginal-rate progressive taxation schemes in this game. We provide a refinement of the basic theory by introducing tax avoidance and showing how it affects the equilibrium outcome of the political game. We first characterize the set of mixed-strategy equilibria of the game in the case of quadratic taxation schemes, showing that tax avoidance enhances the election of marginal-rate progressive tax schemes. Second, we analyse a ``wiggling" taxes' case proving that tax avoidance leads, when ``efficient" enough, to the election of progressive taxation schemes with probability one.

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    Paper provided by HAL in its series Working Papers with number hal-00243060.

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    Date of creation: 2007
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    Handle: RePEc:hal:wpaper:hal-00243060
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    1. Brian Roberson, 2006. "The Colonel Blotto game," Economic Theory, Springer, vol. 29(1), pages 1-24, September.
    2. Jean Hindriks, 2000. "Is There a Demand for Income Tax Progressivity?," Working Papers 415, Queen Mary University of London, School of Economics and Finance.
    3. Carbonell-Nicolau, Oriol & Ok, Efe A., 2007. "Voting over income taxation," Journal of Economic Theory, Elsevier, vol. 134(1), pages 249-286, May.
    4. Banks, Jeffrey S. & Duggan, John & Le Breton, Michel, 2002. "Bounds for Mixed Strategy Equilibria and the Spatial Model of Elections," Journal of Economic Theory, Elsevier, vol. 103(1), pages 88-105, March.
    5. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
    6. Alessandro Lizzeri & Nicola Persico, . ""The Provision of Public Goods Under Alternative Electoral Incentives''," CARESS Working Papres 98-08, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
    7. Bernhardt, Dan & Duggan, John & Squintani, Francesco, 2007. "Electoral competition with privately-informed candidates," Games and Economic Behavior, Elsevier, vol. 58(1), pages 1-29, January.
    8. Kvasov, Dmitriy, 2007. "Contests with limited resources," Journal of Economic Theory, Elsevier, vol. 136(1), pages 738-748, September.
    9. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1995. "Popular support for progressive taxation," Economics Letters, Elsevier, vol. 48(3-4), pages 319-324, June.
    10. Laslier, Jean-Francois & Picard, Nathalie, 2002. "Distributive Politics and Electoral Competition," Journal of Economic Theory, Elsevier, vol. 103(1), pages 106-130, March.
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