Capital Taxation under Political Constraints
Florian Scheuer, Alexander Wolitzky
American Economic Review · 2016 · Volume 106 · Issue 8
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.
Keywords
Consumer Economics: Empirical Analysis, Household Saving, Personal Finance, Personal Income, Wealth, and Their Distributions, Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior, Taxation and Subsidies: Efficiency, Optimal Taxation, Business Taxes and Subsidies including sales and value-added (VAT)
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