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Capital Taxation under Political Constraints

Listed author(s):
  • Alexander Wolitzky

    (Stanford University)

  • Florian Scheuer

    (Stanford University)

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough political coalition supports reform; thus, credible policies are those that will continue to attract enough political support in the future. If the reform threat is to fully equalize consumption, we find that optimal marginal capital taxes are U-shaped, so that savings are subsidized for the middle class but are taxed for the poor and rich. If ex post the government may strategically propose a reform other than full equalization in order to secure additional political support, then optimal capital taxes are instead progressive throughout.

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File URL: https://economicdynamics.org/meetpapers/2014/paper_191.pdf
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Paper provided by Society for Economic Dynamics in its series 2014 Meeting Papers with number 191.

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Date of creation: 2014
Handle: RePEc:red:sed014:191
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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