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Equilibrium Tax Rates under Ex-ante Heterogeneity and Income-dependent Voting

Chang Bo Hyun (), Yongsung Chang () and Kim Sun-Bin ()
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Chang Bo Hyun: Ministry of Economy and Finance of Korea, Seoul, Korea
Kim Sun-Bin: Yonsei University, Seoul, Korea

The B.E. Journal of Macroeconomics, 2022, vol. 22, issue 2, 547-573

Abstract: The standard models with incomplete markets (e.g. Aiyagari) have difficulty justifying the current income tax rates as an optimal or political equilibrium outcome. Given the highly skewed income distribution, the majority of the population would be in favor of raising taxes to a much higher level. We show that incorporating (i) the ex-ante heterogeneity of earnings and (ii) income-dependent voting behavior helps us to reconcile the large gap between the model and data.

Keywords: ex-ante heterogeneity; optimal tax; voter turnout rates (search for similar items in EconPapers)
JEL-codes: E62 H21 H31 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/bejm-2020-0274

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