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Capital taxation under political constraints


Scheuer, Florian; Wolitzky, Alexander (2016). Capital taxation under political constraints. American Economic Review, 106(8):2304-2328.

Abstract

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough coalition of citizens supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when individuals' political behavior is purely determined by economic motives.

Abstract

This paper studies optimal dynamic tax policy under the threat of political reform. A policy will be reformed ex post if a large enough coalition of citizens supports reform; thus, sustainable policies are those that will continue to attract enough political support in the future. We find that optimal marginal capital taxes are either progressive or U-shaped, so that savings are subsidized for the poor and/or the middle class but are taxed for the rich. U-shaped capital taxes always emerge when individuals' political behavior is purely determined by economic motives.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:August 2016
Deposited On:09 Aug 2017 12:55
Last Modified:02 Feb 2018 12:31
Publisher:American Economic Association
ISSN:0002-8282
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1257/aer.20141081

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