DP10418 Capital Taxation under Political Constraints
|Author(s):||Florian Scheuer, Alexander Wolitzky|
|Publication Date:||February 2015|
|Keyword(s):||Coalition Formation, Inequality, Tax Reforms, Wealth Taxation|
|JEL(s):||D3, D6, D9, E6, H2, P5|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10418|
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.