Working Paper: CEPR ID: DP10922
Authors: Ethan Ilzetzki
Abstract: The political impediments to reform and the forces allowing its success are studied in a model where the tax base and statutory rate are separate instruments of tax policy. The model predicts that big bang reforms?large changes in the tax code?may be easier to enact than marginal reforms. Preferences over the tax base face a tipping point where even the beneficiaries from tax exemptions support reform. At such a \reform moment", tax reform is Pareto improving. Politically feasible tax reform occurs when fiscal needs are large, but may nonetheless involve reductions in marginal tax rates. There is strategic complementary in lobbying for tax exemptions, resulting in multiple equilibria. Evidence from tax-base changes in a panel of OECD countries supports a number of the main predictions.
Keywords: tax reform; public economics; lobbying; tax policy
JEL Codes: D72; D78; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high revenue needs (H27) | tax reform is more likely (H29) |
| higher public consumption (H49) | base-broadening reforms (E69) |
| tipping point (F61) | support for reform from beneficiaries of tax exemptions (H20) |
| scale of reform (H11) | political feasibility (D72) |
| strategic lobbying for tax exemptions (H20) | multiple equilibria (D50) |
| comprehensive tax base maintained in one equilibrium (D50) | lobbying for exemptions narrows the base and raises rates (H29) |