Changing Social Preferences and Optimal Redistributive Taxation

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JournalOxford Economic Papers
DateAccepted/In press - 4 Apr 2017
DatePublished (current) - 8 May 2017
Issue number1
Volume70
Number of pages20
Pages (from-to)73-92
Original languageEnglish

Abstract

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.

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