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  3. American Economic Review
  4. August 2016
  5. Capital Taxation under Political Constraints

Capital Taxation under Political Constraints

  • Florian Scheuer
  • Alexander Wolitzky
American Economic Review
vol. 106, no. 8, August 2016
(pp. 2304-28)
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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 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.

Citation

Scheuer, Florian, and Alexander Wolitzky. 2016. "Capital Taxation under Political Constraints." American Economic Review, 106 (8): 2304-28. DOI: 10.1257/aer.20141081

Additional Materials

JEL Classification

  • D12 Consumer Economics: Empirical Analysis
  • D14 Household Saving; Personal Finance
  • D31 Personal Income, Wealth, and Their Distributions
  • D72 Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • H21 Taxation and Subsidies: Efficiency; Optimal Taxation
  • H25 Business Taxes and Subsidies including sales and value-added (VAT)