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
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 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) |