On the Political Economy of Nonlinear Income Taxation

Berliant, Marcus and Gouveia, Miguel (2022): On the Political Economy of Nonlinear Income Taxation.

Abstract

The literatures dealing with voting, optimal income taxation, implementation, and pure public goods are drawn on here to address the problem of voting over income taxes and a public good. In contrast with previous articles, general nonlinear income taxes that affect the labor-leisure decisions of consumers who work and vote are allowed. Uncertainty plays an important role in that the government does not know the true realizations of the abilities of consumers drawn from a known distribution, but must meet the realization-dependent budget; the tax system must be robust. Even though the space of alternatives is infinite dimensional, conditions on primitives are found to assure existence of a majority rule equilibrium when agents vote over both a public good and income taxes to finance it.

• Item Type: MPRA Paper
• Language: English
• Keywords: Voting; Income taxation; Public good; Robustness
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods

References

Aumann, R.J. and M. Kurz, 1977, Power and taxes, Econometrica 45, 1137-1161.

Baron, D. and J. Ferejohn, 1989, Bargaining in legislatures, American Political Science Review 83, 1181-1206.

Bergstrom, T.C., 1979, When does majority rule supply public goods efficiently?, The Scandinavian Journal of Economics 81, 216-226.

Bergstrom,T.C. and R. Cornes, 1983, Independence of allocative efficiency from distribution in the theory of public goods, Econometrica 51, 1753-1765.

Berliant, M., 1992, On income taxation and the core, Journal of Economic Theory 56, 121-141.

Berliant, M. and P.C. Boyer, 2021, Politics and income taxes: Progress and progressivity. Working paper.

Berliant, M. and M. Gouveia, 2001, Incentive compatible income taxation, individual revenue requirements and welfare. https://mpra.ub.uni-muenchen.de/84374/1/MPRA_paper_84374.pdf

Berliant, M. and H. Konishi, 2005, Salience: Agenda choices by competing candidates, Public Choice 125, 129-149.

Berliant, M. and F.H. Page, Jr., 1996, Incentives and income taxation: The implementation of individual revenue requirement functions, Ricerche Economiche 50, 389-400.

Berliant, M. and F.H. Page, Jr., 2001, Income taxes and the provision of public goods: Existence of an optimum, Econometrica 69, 771-784.

Berliant, M. and F.H. Page, Jr., 2006, Budget balancedness and optimal income taxation, Journal of Public Economic Theory 8, 409-451.

Berliant, M. and P. Rothstein, 2000, On models with an uncongestible public good and a continuum of consumers, Journal of Urban Economics 48, 388-396.

Bierbrauer, F.J., 2011, On the optimality of optimal income taxation, Journal of Economic Theory 146, 2105-2116.

Bierbrauer, F.J., Tsyvinski, A. and N. Werquin, 2021, Taxes and turnout: When the decisive voter stays home, CESifo Working Paper No. 8954.

Bishop, K.C. and C. Timmins, 2019, Estimating the marginal willingness to pay function without instrumental variables, Journal of Urban Economics 109, 66-83.

Bowen, H.R., 1943, The interpretation of voting in the allocation of economic resources, The Quarterly Journal of Economics 58, 27-48.

Brett, C. and J.A. Weymark, 2017, Voting over selfishly optimal nonlinear income tax schedules, Games and Economic Behavior 101, 172-188.

Calvert, R., 1986, Models of Imperfect Information in Politics (Harwood Academic Publishers, Chur).

Chen, Y., 2000, Electoral systems, legislative process and income taxation, Journal of Public Economic Theory 2, 71-100.

Foley, D., 1967, Resource Allocation and the Public Sector, Yale Economic Essays 7, 45-98.

Gans, J.S. and M. Smart, 1996, Majority voting with single-crossing preferences, Journal of Public Economics 59, 219-237.

Gouveia, M., 1997. Majority rule and the public provision of a private good, Public Choice 93, 221-244.

Guesnerie, R. and J.-J. Laffont, 1984, A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm, Journal of Public Economics 25, 329-369.

Guesnerie, R. and C. Oddou, 1981, Second best taxation as a game, Journal of Economic Theory 25, 67-91.

Heathcote, J. and H. Tsujiyama, 2021, Optimal income taxation: Mirrlees meets Ramsey, Journal of Political Economy 129, 3141-3184.

Hettich, W. and S.L. Winer, 1988, Economic and political foundations of tax structure, American Economic Review 78, 701-713.

Hirsch, M., 1976, Differential Topology (Spinger-Verlag, New York, NY).

Kaneko, M., 1981, On the existence of an optimal income tax schedule, Review of Economic Studies 48, 633-642.

Kapička, M., 2013, Efficient allocations in dynamic private information economies with persistent shocks: A first-order approach, Review of Economic Studies 80, 1027-1054.

Kocherlakota, N.R. and Y. Song, 2019, Public goods with ambiguity in large economies, Journal of Economic Theory 182, 218-246.

Laffont, J.-J., 1988, Fundamentals of Public Economics (MIT Press, Cambridge, MA).

Laroque, G.R., 2005, Indirect taxation is superfluous under separability and taste homogeneity: A simple proof, Economics Letters 87, 141-144.

Ledyard, J., 1984, The pure theory of large two-candidate elections, Public Choice 44, 1-43.

Lensman, T. and M. Troshkin, 2020, Implications of uncertainty for optimal policies, Journal of Economic Theory, forthcoming.

Lindahl, E., 1919, Positive lösung, die gerechtigkeit der besteuerung, translated as Just taxation --- a positive solution, in: R.A. Musgrave and A.T. Peacock, eds., Classics in the Theory of Public Finance (Macmillan, London).

L'Ollivier, S. and J.-C. Rochet, 1983, Bunching and second order conditions: A note on optimal tax theory, Journal of Economic Theory 31, 392-400.

Mailath, G., 1987, Incentive compatibility in signaling games with a continuum of types, Econometrica 55, 1349-1365.

Meltzer, A. and S. Richard, 1981, A rational theory of the size of government, Journal of Political Economy 89, 914-927.

Meltzer, A. and S. Richard, 1983, Tests of a rational theory of the size of government, Public Choice 41, 403-418.

Mill, J.S., 1848, Principles of Political Economy (Longmans Green, London).

Mirrlees, J.A., 1971, An exploration in the theory of optimum income taxation, Review of Economic Studies 38, 175-208.

Munkres, J.R., 1975, Topology: A First Course (Prentice-Hall, Englewood Cliffs, NJ).

Musgrave, R.A., 1959, The Theory of Public Finance (McGraw Hill, New York).

Nakayama, M., 1976, A note on the core of an income redistribution game, Journal of Economic Theory 12, 347-349.

Peck, R.M., 1986, Power and linear income taxes: An example, Econometrica 54, 87-94.

Plott, C.R., 1967, A notion of equilibrium and its possibility under majority rule, American Economic Review 67, 787-806.

Riley, J., 1979, Informational equilibrium, Econometrica 47, 331-359.

Roberts, K.W.S., 1977, Voting over income tax schedules, Journal of Public Economics 8, 329-340.

Röell, A., 1996, Voting over nonlinear income tax schedules, mimeo.

Roemer, J.E., 1999, The democratic political economy of progressive income taxation, Econometrica 67, 1-19.

Romer, T., 1975, Individual welfare, majority voting, and the properties of a linear income tax, Journal of Public Economics 4, 163-186.

Rudin, W., 1974, Real and Complex Analysis (McGraw-Hill, New York, NY).

Samuelson, P.A., 1954, The pure theory of public expenditure, Review of Economics and Statistics 36, 387-389.

Samuelson, P.A., 1955, Diagrammatic exposition of a theory of public expenditure, Review of Economics and Statistics 37, 350-356.

Schofield, N., 1978, Instability of simple dynamic games, Review of Economic Studies 45, 575-594.

Seade, J.K., 1977, On the shape of optimal tax schedules, Journal of Public Economics 7, 203-235.

Snyder, J.M. and G.H. Kramer, 1988, Fairness, self-interest, and the politics of the progressive income tax, Journal of Public Economics 36, 197-230.

Stiglitz, J.E., 2015, In praise of Frank Ramsey's contribution to the theory of taxation, The Economic Journal 125, 235-268.

Spence, M., 1974, Market Signaling (Harvard, Cambridge, MA).