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Title: Capital Taxation under Political Constraints

Author(s): Florian Scheuer and Alexander Wolitzky

Publication Date: February 2015

Keyword(s): Coalition Formation, Inequality, Tax Reforms and Wealth Taxation

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Scheuer, F and Wolitzky, A. 2015. 'Capital Taxation under Political Constraints'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10418