Discussion paper

DP10418 Capital Taxation under Political Constraints

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.


Scheuer, F (2015), ‘DP10418 Capital Taxation under Political Constraints‘, CEPR Discussion Paper No. 10418. CEPR Press, Paris & London. https://cepr.org/publications/dp10418