Capital Taxation Under Political Constraints

Working Paper: CEPR ID: DP10418

Authors: Florian Scheuer; Alexander Wolitzky

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 political coalition 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 the salient reform threat consists of radically redistributing capital and individuals' political behavior is purely determined by economic motives.

Keywords: Coalition formation; Inequality; Tax reforms; Wealth taxation

JEL Codes: D3; D6; D9; E6; H2; P5


Causal Claims Network Graph

Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.


Causal Claims

CauseEffect
political sensitivity of voters (D72)optimal marginal capital taxes (H21)
utility sensitivity of consumption (D11)optimal marginal capital taxes (H21)
individual savings (D14)political support for reform (E69)
political behavior of poor voters (D72)support for reforms promoting equality (E69)
political behavior of rich voters (D72)opposition to reforms promoting equality (J79)
middle class's consumption levels (E21)political support for tax reforms (H29)

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