On Progressive Taxation, Income Redistribution and Political Representation
How can we reconcile recent theories predicting that the U.S. tax system should be sharply progressive [see for example Cukierman and Meltzer (1991)], with decades of empirical studies showing that the U.S. tax system is actually roughly proportional? I start by showing that cross-sectional data provide strong empirical support for the hypothesis that income inequality impacts on the allocative incidence of public expenditure, suggesting the average net tax rate--instead of the average tax rate--as the appropriate measure of progressivity. I then construct a positive theory of income redistribution through progressive income taxation where distributional objectives matter in the design of the fiscal policy. The progressivity of the average net tax rate implied by the model is consistent with the study by Musgrave, Case and Leonard (1974) for the U.S. economy.
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