Hidden Taxes and Representative Government: The Political Economy of the Ramsey Rule

Susanne Lohmann and Deborah M. Weiss
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Susanne Lohmann: University of California, Los Angeles
Deborah M. Weiss: University of Texas

Public Finance Review, 2002, vol. 30, issue 6, 579-611

Abstract: A social planner finances a public good by taxing the consumption of two private goods. If leisure cannot be taxed, the tax burden is minimized by setting the tax rates on the two goods inversely proportional to their price elasticities of demand (Ramsey rule). The authors replace the social planner with an elected policy maker who cares not only about minimizing the tax burden but also about getting reelected. Electoral competition creates incentives for the incumbent to deviate from the Ramsey rule: He or she decreases the tax rate that is relatively visible and increases the tax rate that is relatively hidden.

Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:sae:pubfin:v:30:y:2002:i:6:p:579-611

DOI: 10.1177/109114202238004

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