Working Paper: CEPR ID: DP8507
Authors: Micael Castanheira; Gatan Nicodème; Paola Profeta
Abstract: There is often a gap between the prescriptions of an "optimal" tax system and actual tax systems, some of which can be neither efficient economically nor efficient at redistributing income. With a focus on personal income taxes, this paper reviews the political economics literature on tax systems and reforms to see whether political mechanisms allow us to better understand why tax systems look the way they look. Finally, we exploit a database of reforms in labour taxation in the European Union to check the determinants of all reforms, on the one hand, and of targeted reforms, on the other hand. The results fit well with political economy theories and show that political variables carry more weight in triggering reforms than economic variables. This shed light on whether and how tax reforms are achievable. It also explains why many reforms that seem economically optimal fail to be implemented.
Keywords: personal income tax; political economy; taxation
JEL Codes: H11; H21; H24; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political mechanisms (D72) | structure of tax systems (H20) |
| size of ruling coalitions (D72) | likelihood of tax reforms (H29) |
| political competition (D72) | suboptimal tax rates (H21) |
| political variables (D72) | tax reforms (H29) |
| economic conditions (E66) | tax reforms (H29) |