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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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    Date of creation: 2007
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    Handle: RePEc:hal:wpaper:hal-00243060
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00243060
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    1. Jeffrey S. Banks & John Duggan & Michel LeBreton, . "Bounds for Mixed Strategy Equilibria and the Spatial Model of Elections," Wallis Working Papers WP14, University of Rochester - Wallis Institute of Political Economy.
    2. Alessro Lizzeri & Nicola Persico, . "The Provision of Public Goods Under Alternative Electoral Incentives," Penn CARESS Working Papers b96440ba0bfa06ca550ac40aa, Penn Economics Department.
    3. Hindriks, Jean, 2001. "Is there a demand for income tax progressivity?," Economics Letters, Elsevier, vol. 73(1), pages 43-50, October.
    4. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1995. "Popular support for progressive taxation," Economics Letters, Elsevier, vol. 48(3-4), pages 319-324, June.
    5. Kvasov, Dmitriy, 2007. "Contests with limited resources," Journal of Economic Theory, Elsevier, vol. 136(1), pages 738-748, September.
    6. Carbonell-Nicolau, Oriol & Ok, Efe A., 2007. "Voting over income taxation," Journal of Economic Theory, Elsevier, vol. 134(1), pages 249-286, May.
    7. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
    8. John Duggan, 2003. "Electoral Competition with Privately Informed Candidates," Theory workshop papers 505798000000000029, UCLA Department of Economics.
    9. Brian Roberson, 2006. "The Colonel Blotto game," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 29(1), pages 1-24, September.
    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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