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Democracy, redistribution and optimal tax structures

Author

Listed:
  • Santanu Gupta
  • Raghbendra Jha

Abstract

In a probabilistic voting model with three jurisdictions and residents with different incomes, we analyze inefficiencies in local public good allocation that emerge from trying to satisfy the median voter. The median voter and the rich may gain but the poor lose out. We analyze a uniform tax rate and progressive two and three bracket tax structures. If the government extracts part of tax revenues as political rents and maximizes expected payoff there is a possibility of taxing away all private income with no allocation of public good, if electoral uncertainty is high, especially when the government is risk neutral.

Suggested Citation

  • Santanu Gupta & Raghbendra Jha, 2016. "Democracy, redistribution and optimal tax structures," Departmental Working Papers 2016-13, The Australian National University, Arndt-Corden Department of Economics.
  • Handle: RePEc:pas:papers:2016-13
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    File URL: https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2016-07/2016-13_jha_income_redistribution_final_version.pdf
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    References listed on IDEAS

    as
    1. Slemrod, Joel & Yitzhaki, Shlomo & Mayshar, Joram & Lundholm, Michael, 1994. "The optimal two-bracket linear income tax," Journal of Public Economics, Elsevier, vol. 53(2), pages 269-290, February.
    2. Snyder, James M. & Kramer, Gerald H., 1988. "Fairness, self-interest, and the politics of the progressive income tax," Journal of Public Economics, Elsevier, vol. 36(2), pages 197-230, July.
    3. Roemer, John E., 1998. "Why the poor do not expropriate the rich: an old argument in new garb," Journal of Public Economics, Elsevier, vol. 70(3), pages 399-424, December.
    4. Robert Spann, 1974. "Collective consumption of private goods," Public Choice, Springer, vol. 20(1), pages 63-81, December.
    5. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    6. James Buchanan, 1970. "Notes for an Economic theory of socialism," Public Choice, Springer, vol. 8(1), pages 29-43, March.
    7. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
    8. Stigler, George J, 1970. "Director's Law of Public Income Redistribution," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 1-10, April.
    9. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
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    More about this item

    Keywords

    median voter; local public good; income redistribution;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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