School of Economics and Finance

No. 416: The Politics of Progressive Income Taxation with Incentive Effects

Philippe De Donder , IDEI, University of Toulouse 1
Jean Hindriks , Queen Mary and Westfield College, University of London

July 1, 2000

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This paper studies majority voting over non-linear income taxes when individuals respond to taxation by substituting untaxable leisure to taxable labor (incentive effects). We first show that voting cycle over progressive and regressive taxes is inevitable. This is because the middle-class can always lower its tax burden at the expense of the rich by imposing progressive taxes (convex tax function) while the rich and the poor can reduce their tax burden by imposing regressive taxes (concave tax function). We then investigate three solutions to this cycling problem: (i) reducing the policy space to the policies that are ideal for some voter; (ii) weakening the voting equilibrium concept; (iii) assuming parties also care about the size of their majority. The main results is that progressivity emerges as a voting equilibrium if there is a lack of polarization at the extremes of the income distribution. Interestingly the poor would prefer regressive taxes.

J.E.L classification codes: D72

Keywords:Majority voting, Income taxation, Tax progressivity