Changing Social Preferences and Optimal Redistributive Taxation

TY - JOUR

T1 - Changing Social Preferences and Optimal Redistributive Taxation

AU - Krause, Alan

AU - Guo, Jang-Ting

N1 - © Oxford University Press 2017. All rights reserved. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

PY - 2017/5/8

Y1 - 2017/5/8

N2 - We examine a dynamic model of optimal nonlinear taxation of labour income and savings, in which there are two political parties: left-wing and right-wing. The parties differ only in their redistributive preferences, with the left-wing party having a stronger preference for redistribution. Our analysis explicitly considers the possibility that society's preference for redistribution may change, as reflected in its future voting behaviour. The incumbent government respects the possibility that society's preference may change, and sets taxes to maximize expected social welfare. Our main result is that an incumbent left-wing (resp. right-wing) government will implement a regressive (resp. progressive) savings tax policy. The incumbent government implements this policy not out of self-interest, but to accommodate the redistributive goals of the opposing party.

AB - We examine a dynamic model of optimal nonlinear taxation of labour income and savings, in which there are two political parties: left-wing and right-wing. The parties differ only in their redistributive preferences, with the left-wing party having a stronger preference for redistribution. Our analysis explicitly considers the possibility that society's preference for redistribution may change, as reflected in its future voting behaviour. The incumbent government respects the possibility that society's preference may change, and sets taxes to maximize expected social welfare. Our main result is that an incumbent left-wing (resp. right-wing) government will implement a regressive (resp. progressive) savings tax policy. The incumbent government implements this policy not out of self-interest, but to accommodate the redistributive goals of the opposing party.

UR - http://www.scopus.com/inward/record.url?scp=85040220508&partnerID=8YFLogxK

U2 - 10.1093/oep/gpx025

DO - 10.1093/oep/gpx025

M3 - Article

SN - 0030-7653

VL - 70

SP - 73

EP - 92

JO - Oxford Economic Papers

JF - Oxford Economic Papers

IS - 1

ER -