Politics and income taxes: progress and progressivity

Berliant, Marcus and Boyer, Pierre (2022): Politics and income taxes: progress and progressivity.

Abstract

This paper begins with a survey of the literature on the political economy approaches to labor income taxation. We focus on recent progress made by examining in detail the specific properties of non-linear taxes derived in the context of voting. Next, we present new results on the existence of majority voting equilibrium that unify work in the standard framework. Finally, we discuss how recent theoretical results help us uncover empirical patterns from the last 50 years in the US tax system, namely a sharp decrease in top marginal tax rates, the rise of the Earned Income Tax Credit (EITC), and increased progressivity in the middle of the income distribution.

• Item Type: MPRA Paper
• Language: English
• Keywords: non-linear income taxation; tax reform; political economy; optimal taxation; EITC
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games; 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

References

Acemoglu, D., M. Golosov, and A. Tsyvinski (2008). Political economy of mechanisms. Econometrica, 76, 619-641.

Acemoglu, D., M. Golosov, and A. Tsyvinski (2010). Dynamic Mirrlees taxation under political economy constraints. Review of Economic Studies, 77, 841-881.

Acemoglu, D., S. Naidu, P. Restrepo, and J. Robinson (2015). Democracy, redistribution, and inequality. Handbook of Income Distribution, 1885-1966.

Alesina, A. and G.-M. Angeletos (2005). Fairness and redistribution. American Economic Review, 95(4), 960-980.

Alesina, A., S. Stantcheva, and E. Teso (2018). Intergenerational mobility and support for redistribution. American Economic Review, 108(2), 521-554.

Banks, J. and J. Duggan (2005). Probabilistic voting in the spatial model of elections: The theory of office-motivated candidates. In Social choice and strategic decisions, pp. 15-56, Springer.

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

Barro, R. (1973). The control of politicians: An economic model. Public Choice, 14, 19-42.

Battaglini, M. and S. Coate (2008). A dynamic theory of public spending, taxation and debt. American Economic Review, 98, 201-236.

Bellani, L. and H. Ursprung (2019). The Political Economy of Redistribution Policy. In The Oxford Handbook of Public Choice, Volume 2, edited by R. D. Congleton, B. N. Grofman and S. Voigt, Oxford University Press.

Bénabou, R. (2000). Unequal societies: Income distribution and the social contract. American Economic Review, 90(1), 96-129.

Bénabou, R. (2002). Tax and education policy in a heterogeneous-agent economy: What levels of redistribution maximize growth and efficiency? Econometrica, 70(2), 481-517.

Bénabou, R. and E. Ok (2001). Social mobility and the demand for redistribution: The POUM hypothesis. Quarterly Journal of Economics, 116(2), 447-487.

Bénabou, R. and J. Tirole (2006). Belief in a just world and redistributive politics. Quarterly Journal of Economics, 121(2), 699-746.

Berliant, M. and M. Gouveia (2001). Incentive compatible income taxation, individual revenue requirements and welfare. MPRA Working Paper.

Berliant, M. and M. Gouveia (2020). On the political economy of income taxation. MPRA Working Paper.

Berliant, M. and J. Ledyard (2014). Optimal dynamic nonlinear income taxes with no commitment. Journal of Public Economic Theory 16, 196-221.

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

Berliant, M. and F. Page (2001). Income taxes and the provision of public goods: existence of an optimum. Econometrica, 69(3), 771-784.

Berliant, M. and F. Page (2006). Budget balancedness and optimal income taxation. Journal of Public Economic Theory, 8(3), 409-451.

Besley, T. and S. Coate (1997). A model of representative democracy. Quarterly Journal of Economics, 112, 85-114.

Bierbrauer, F.J. and P.C. Boyer (2013). Political competition and Mirrleesian income taxation: A first pass. Journal of Public Economics, 103, 1-14.

Bierbrauer, F.J. and P.C. Boyer (2016). Efficiency, welfare, and political competition. Quarterly Journal of Economics, 131 (1), 461-518.

Bierbrauer, F.J., Boyer, P.C. and A. Peichl (2021). Politically feasible reforms of non-linear tax systems. American Economic Review, 111 (1): 153-91.

Bierbrauer, F.J., Boyer, P.C. and E. Hansen (2020). Pareto-improving tax reforms and the Earned Income Tax Credit. CEPR Discussion paper DP14853.

Bierbrauer, F.J., C. Brett, and J. Weymark (2013). Strategic nonlinear income tax competition with perfect labor mobility. Games and Economic Behavior, 82, 292-311.

Bierbrauer, F.J., A. Tsyvinski, and N. Werquin (2022). Taxes and Turnout: When the Decisive Voter Stays at Home. American Economic Review, 112(2): 689-719.

Blomquist, S. and V. Christiansen (1999). The political economy of publicly provided private goods. Journal of Public Economics, 73, 31-54.

Bohn, H. and C. Stuart (2013). Revenue extraction by median voters. Working paper, University of California at Santa Barbara.

Borel, E. (1921). La théorie du jeu et les équations intégralesa noyau symétrique. Comptes rendus de l'Académie des Sciences, 173(1304-1308), 58.

Brett, C. and J. Weymark (2016). Voting over selfishly optimal nonlinear income tax schedules with a minimum-utility constraint. Journal of Mathematical Economics, 67, 18-31.

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

Brett, C. and J.A. Weymark (2020). Majority rule and selfishly optimal nonlinear income tax schedules with discrete skill levels. Social Choice and Welfare, 54, 337-362.

Carbonell-Nicolau, O. and E. Ok (2007). Voting over income taxation. Journal of Economic Theory, 134, 249-286.

Casamatta, G., H. Cremer, and P. De Donder (2010). Repeated electoral competition over nonlinear income tax schedules. Social Choice and Welfare 35, 535-574.

Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinte lives. Econometrica, 54(3), 607-622.

Chetty, R. (2009). Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods. Annual Review of Economics, 1(1), 451-488.

Choné, P. and G. Laroque (2011). Optimal taxation in the extensive model. Journal of Economic Theory, 146(2), 425-453.

Coughlin, P. and S. Nitzan (1981). Electoral outcomes with probabilistic voting and Nash social welfare maxima. Journal of Public Economics, 15(1), 113-121.

Cox, G. and M. McCubbins (1986). Electoral Politics as a Redistributive Game. Journal of Politics, XLVIII (1986), 370-389.

Crutzen, B. and N. Sahuguet (2009). Redistributive politics with distortionary taxation. Journal of Economic Theory, 144, 264-279.

De Donder, P. and J. Hindriks (2003). The politics of progressive income taxation with incentive effects. Journal of Public Economics, 87, 2491-2505.

Diamond, P.A. (1998). Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates. American Economic Review, 88, 83-95.

Diamond, P.A. and E. Saez (2011). The case for a progressive tax: from basic research to policy recommendations. Journal of Economic Perspectives, 25(4), 165-90.

Dixit, A. and J. Londregan (1996). The determinants of success of special interests in redistributive politics. Journal of Politics, 58 (4), 1132-1155.

Dixit, A. and J. Londregan (1998). Ideology, tactics, and efficiency in redistributive politics. Quarterly Journal of Economics, 113 (2), 497-529.

Downs, A. (1957). An Economic Theory of Democracy. New York, Harper and Row.

Drazen, A. (2000). Political Economy in Macroeconomics. Princeton University Press.

Fahri, E. and I. Werning (2008). The political economy of non-linear capital taxation. Mimeo, MIT.

Farhi, E., C. Sleet, I. Werning, and S. Yeltekin (2012). Non-linear capital taxation without commitment. Review of Economic Studies, 79 (4), 1469-1493.

Feldstein, M.S. (1969). The effects of taxation on risk taking. Journal of Political Economy, 77(5), 755-764.

Feldstein, M.S. (1976). On the theory of tax reform. Journal of Public Economics, 6(1-2), 77-104.

Ferejohn, J. (1986). Incumbent performance and electoral control. Public Choice, 50, 5-25.

Fernandes, A. and C. Phelan (2000). A recursive formulation for repeated agency with history dependence. Journal of Economic Theory, 91, 223-247.

Gans, J. and M. Smart (1996). Majority voting with single -crossing preferences. Journal of Public Economics, 59(2), 219-237.

Golosov, M., A. Tsyvinski, and N. Werquin (2014). A Variational Approach to the Analysis of Tax Systems, NBER Working Paper 20780.

Guesnerie, R. (1995). A Contribution to the Pure Theory of Taxation. Cambridge University Press.

Hansen, E. (2021). Optimal Income Taxation with Labor Supply Responses at Two Margins: When Is An Earned Income Tax Credit Optimal?, Journal of Public Economics, 195, 1043-65.

Heathcote, J., Storesletten, K., and Violante, G.L. (2017). Optimal tax progressivity: An analytical framework. Quarterly Journal of Economics, 132(4), 1693-1754.

Hemming, R. and M.J. Keen (1983). Single crossing conditions in comparisons of tax progressivity. Journal of Public Economics, 20, 373-380.

Hinich, M. (1977). Equilibrium in spatial voting: The median voter result is an artifact. Journal of Economic Theory, 16 (2), 208-219. Hotz, V.J. and J.K. Scholz (2003). The Earned Income Tax Credit, in R.A. Moffitt, ed., Means-Tested Transfer Programs in the United States, University of Chicago Press, chapter 3, 141-198.

Hoynes, H. (2019). The Earned Income Tax Credit. Annals of the American Academy of Political and Social Science, 686(1), 180-203.

Jacobs, B., E.L.W. Jongen, and F.T. Zoutman (2017). Revealed social preferences of Dutch political parties. Journal of Public Economics, 156: 81-100.

Jacquet, L. and E. Lehmann (2020). Optimal taxation with composition effects. Journal of the European Economic Association.

Jacquet, L., Lehmann E. and B. Van der Linden (2013). Optimal redistributive taxation with both extensive and intensive responses. Journal of Economic Theory, 148 (5), 1770-1805.

Judd, K. L. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28 (1), 59-83.

Kapička, M. (2013). Efficient allocations in dynamic private information economies with persistent shocks: A first-order approach. Review of Economic Studies, 80(3), 1027-1054.

Kleven, H. (2020). The EITC and the extensive margin: A reappraisal. National Bureau of Economic Research.

Kleven, H. (2021). Sufficient statistics revisited, Annual Review of Economics, 13.

Kovenock, D. and B. Roberson (2020). Generalizations of the general lotto and Colonel Blotto games. Economic Theory.

Ledyard, J. (1981). The paradox of voting and candidate competition: A general equilibrium analysis. In Handbook of Experimental Economics. Princeton, NJ: Princeton University Press.

Ledyard, J. (1984). The pure theory of large two-candidate elections. Public Choice, 44 (1), 7-41.

Lehmann, E., L. Simula, and A. Trannoy (2014). Tax me if you can! Optimal nonlinear income tax between competing governments. Quarterly Journal of Economics, 129 (4), 1995-2030.

Lindbeck, A. and J. Weibull (1987). Balanced-budget redistribution as the outcome of political competition. Public Choice, 52, 273-297.

Lizzeri, A. and N. Persico (2001). The provision of public goods under alternative electoral incentives. American Economic Review, 91 (1), 225-239.

Martimort, D. (2001). Optimal taxation and strategic budget deficit under political regime switching. Review of Economic Studies, 68, 573-592.

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

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

Moffitt, R.A. (2003). The Negative Income Tax and the Evolution of U.S. Welfare Policy, Journal of Economic Perspectives, 17(3), 119-140.

Morelli, M., H. Yang, and L. Ye (2012). Competitive nonlinear taxation and constitutional choice. American Economic Journal: Microeconomics, 4 (1), 142-75.

Musgrave, R.A., and Thin, T. (1948). Income tax progression, 1929-48. Journal of Political Economy, 56(6), 498-514.

Myerson, R. (1993). Incentives to cultivate favored minorities under alternative electoral systems. American Political Science Review, 87(4), 856-869.

Nichols, A. and J. Rothstein (2015). The Earned Income Tax Credit (EITC), NBER Working Paper Series, 2015.

Osborne, M. and A. Slivinski (1996). A model of political competition with citizen-candidates. Quarterly Journal of Economics 111, 65-96.

Persson, T. and G. Tabellini (2000). Political Economics: Explaining Economic Policy. Cambridge, MA, MIT Press.

Piketty, T. (1995). Social mobility and redistributive politics. Quarterly Journal of Economics 110 (3), 551-584.

Piketty, T. (1997). La redistribution scale face au chômage. Revue française d'économie, 12, 157-201.

Piketty, T. and E. Saez (2013). Optimal labor income taxation. In Handbook of Public Economics (Vol. 5, pp. 391-474). Elsevier.

Roberts, K.W. (1977). Voting over income tax schedules. Journal of Public Economics, 8(3), 329-340.

Röell, A. (2012). Voting over nonlinear income tax schedules. Working Paper.

Roemer, J. (1999). The democratic political economy of progressive income taxation. Econometrica, 134, 1-19.

Roemer, J. (2012). The political economy of income taxation under asymmetric information: the two-type case. SERIEs, 3, 181-199.

Romer, T. (1975). Individual welfare, majority voting, and the properties of a linear income tax. Journal of Public Economics, 4 (2), 163-185.

Rothschild, M. and J.E. Stiglitz (1970). Increasing Risk: I. A Definition. Journal of Economic Theory, 2, 225-243.

Saez, E. (2001). Using elasticities to derive optimal income tax rates. Review of Economic Studies, 68(1), 205-229.

Saez, E. (2002). Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses. Quarterly Journal of Economics, 117 (3), 1039-1073.

Saez, E. and S. Stantcheva (2016). Generalized social marginal welfare weights for optimal tax theory. American Economic Review, 106 (1), 24-45.

Scheuer, F. and A. Wolitzky (2016). Capital taxation under political constraints. American Economic Review, 106 (8), 2304-2328.

Sheshinski, E. (1972). The optimal linear income tax. Review of Economic Studies 39, 297-302.

Sleet, C. and S. Yeltekin (2008). Politically credible social insurance. Journal of Monetary Economics, 55(1), 129-151.

Snyder, J. and G. Kramer (1988). Fairness, self-interest, and the politics of the progressive income tax. Journal of Public Economics, 36 (2), 197-230.

Stiglitz, J. (1982). Self-selection and Pareto-efficient taxation. Journal of Public Economics, 17, 213-240.

Vickrey, W. (1945). Measuring marginal utility by reactions to risk. Econometrica, 13 (4), 319-333.

Weymark, J.A. (1984). Majority-rule directions of income tax reform and second-best optimality. Scandinavian Journal of Economics, 86 (2), 194- 213.