Representative Democracy and Marginal Rate Increasing Income
Taxation
(joint with Oriol Carbonell-Nicolau,
Journal of
Public Economics, September
2003, 87(9-10): 2339-2366.
This paper develops a
political economy model that is consistent with the fact that democracies have
a preference for increasing marginal tax rates on income. We present a model in
which there is an exogenous set of political parties with preferences over the
set of admissible tax schedules. This set contains virtually any increasing and
piecewise linear continuous function. Each party decides whether or not to
present a candidate for election. There is a fixed cost of running. The elected
candidate implements one of her preferred tax policies. Our main results
provide conditions under which a Strong Nash Equilibrium exists, and a tax
schedule with increasing marginal tax rates is implemented in some Nash Equilibria and in any Strong Nash Equilibrium.