DP8507 On the political economics of tax reforms

Author(s): Micael Castanheira, Gaëtan Nicodème, Paola Profeta
Publication Date: August 2011
Keyword(s): personal income tax, political economy, taxation
JEL(s): H11, H21, H24, P16
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8507

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.