A Contribution to the Positive Theory of Indirect Taxation

Canegrati, Emanuele (2007): A Contribution to the Positive Theory of Indirect Taxation.

Abstract

In this paper I analyse a probabilistic voting model where self-interested governments set their taxation policies in order to maximise the probabil- ity of winning elections. Society is divided into groups which have di¤erent preferences for the consumption of goods. Results show how candidates are captured by the most powerful groups, which not necessarily repre- sent the median voter but may be located at more extreme positions. The introduction of a probabilistic voting model characterized by the presence of single-minded groups overrules the classic results achieved by the me- dian voter theorem, because it is no longer the position on the income scale to drive the equilibrium policy but the ability of groups to focus on their most preferred goods, instead. This ability allows them to achieve a strong political power which candidates cannot help going along with, because they would lose elections otherwise.

• Item Type: MPRA Paper
• Language: English
• Keywords: Probabilistic Voting Theory, Single-mindedness, Indirect Taxation, Public Expenditure
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H5 - National Government Expenditures and Related Policies > H53 - Government Expenditures and Welfare Programs

References

[1] Auerbach, A. (1985) The Theory of Excess Burden and Optimal Taxation, in Handbook of Public Economics, Vol. I, Elsevier. [2] Atkinson, A. B. and Stiglitz (1976) The Design of tax Structure: Direct versus Indirect Taxation. the Journal of Public Economics 6, pp. 55-75. [3] Beckmann, K. (2002) How Leviathan Taxes, Constitutional Political Econ- omy, Vol.13, pp. 265-273. [4] Boadway, R. W. and Bruce, N. (1984), Welfare Economics, Basil Blackwell [5] Canegrati, E. (2006) The Single-Mindedness Theory: Micro-foundation and Applications to Social Security Systems, mimeographed [6] Coughlin, P. (1985) Elections with Redistributional Reputations. Prepared for the 1985 Carnegie-Mellon conference on Political Economy. [7] Coughlin, P. (1992) Probabilistic Voting Theory, Cambridge University Press [8] Diamond, P. (1975) A Many-Person Ramsey Rule, Journal of Public Eco- nomics Vol.4, pp.335-42 [9] Gahvari, F. (2006) On the Marginal Cost of Public Funds and the Optimal Provision of Public Goods, Journal of Public Economics, Vol. 90 pp.1251- 1262 [10] Gentry, W. Optimal Taxation, Columbia University, mimeo [11] Hettich, W. & Winer, S. (1999), Democratic Choice and Taxation: A The- oretical and Empirical Analysis, Cambridge University Press [12] Hinich, M, Ledyard, J and Ordershook, P. (1973) A Theory of Electoral Equilibrium: A Spatial Analysis Based on the Theory of Games, Journal of Politics, 35; pp. 154-193 [13] Jones, F. (2007) The E¤ects of Taxes and Bene�ts on Household In- come 2005/2006. Non-journal article, O¢ ce for National Statistics, http://www.statistics.gov.uk/CCI/article.asp?ID=1804 [14] Kaplow, L. (2006) On the Undesirability of Commodity Taxation even when Income taxation is not Optimal, Journal of Public Economics, 90, pp. 1235- 1250. [15] Keen, M. (2007) Vat Attacks! IMF Working Paper WP/07/142, Interna- tional Monetary Fund. [16] Laroque, G.R. (2005) Indirect Taxation is Super�uous under Separability and Taste Homogeneity: A simple Proof, Economics Letters 87, pp. 141-144 [17] Lindbeck, A. & Weibull, J. (1987), Balanced-budget redistribution as the outcome of political competition. Public Choice 52(3): 273-297 [18] Meltzer, A. & Richard, S. (1985) A Positive Theory of in-kind Transfers and the Negative Income Tax, Public Choice 47, pp.231-265 [19] Mulligan C. B. & Sala-i-Martin: Social Security, Retirement and the Single- Mindness of the Electorate, (1999) NBER Working Paper 9691 [20] Persson, T. & Tabellini, G. (2000), Political Economics: Explaining Eco- nomic Policy, MIT Press [21] Polo, M. (1998) Electoral Competition and Political Rents, IGIER, Milan, mimeo [22] Ramsey , F. P. (1927) A Contribution to the Theory of Taxation, Economic Journal, Vol.37, pp. 47-61 [23] Roberts, K. (1977) Voting over Income Tax Schedules, Journal of Public Economics 8, pp: 392-340 [24] Romer, T. (1975) Individual Welfare, Majority Voting and the Properties of a Linear Income Tax, Journal of Public Economics 7, pp:163-168 [25] Saez, E. (2002) The desirability of commodity taxation under non-linear income taxation and heterogeneous tastes, Journal of Public Economics Vol. 83, pp.217-230 [26] Svensson, J. (1997) The Control of Public Policy: Electoral Competition, Polarization and Primary Elections, The World Bank, Washington D.C. mimeo