Capital Taxation under Political Constraints
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 optim...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
American Economic Association (AEA)
2016
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| Online Access: | http://hdl.handle.net/1721.1/103979 https://orcid.org/0000-0001-7277-4118 |
| Summary: | 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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